Why can't I afford a damn house, even though I've stopped buying avocados?

if people knew how money really worked, there would be rioting in the streets

Ever asked any of the following?

• Why can't I afford a damn house, even though I've stopped buying avocados?

• Why is the insane cost-of-living rise kicking my ass?

• Why is this crazy housing bubble not popping?

• How come a single income could support a whole family in the 50s, but families are now struggling on a double income?

• Is the middle class disappearing?

• Why are all my friends getting inheritances?

• What is a "run on the banks"? Is it safe to keep my money in a bank? Or should I hide all my money under my mattress?

• Why is Bitcoin being called an "inflation hedge" and a "flight to safety"?

• What even is money?

Ok cool, welcome to being a human in today's rough economic seas. Let's ride the waves together.

I will try to answer everything by explaining why:

1. All money is debt.

2. Our wealth is mostly illusory.

3. Inflation is theft.

4. We are experiencing the largest wealth transfer of our lifetimes.

5. A thriving economy must be based on hard money - not soft money.

6. We have a moral imperative to buy a house.

7. You should keep buying avocados.

Ok, let's begin.

ALL MONEY IS DEBT.

All money is debt in fiat systems.

I can hear you muttering: "But kari - Money is not debt. Money is money. Debt is debt. Invest in a dictionary."

Do something for me. Take out a crisp $100 note. Hold it in the light. What's it worth? Is it worth $100? What if I told you it is technically not worth anything more than the material it's printed on?

It's worth $100 because we all agreed on it. The money we use is backed purely by our collective faith in it. This is called "fiat money". It is government-issued, has no tie to hard assets, and can be printed without restriction.

Because our currency is not backed by a hard asset, it has no intrinsic value. And since it has no intrinsically-valuable commodity backing it, it is a form of credit - a claim on purchasing power that we promise to pay back. All fiat money is debt.

If you're still confused, stick with me. Let's think about debt from first principles. Imagine I borrow money from you. This money becomes an asset for you, and a liability for me. It's a liability for me because I need to eventually pay that money back to you. Now in our current system, all financial assets are liabilities that need to be paid back. The money we have is an asset for us but a liability for our bank. Our bank's assets are a liability of the central bank. The central bank's assets are a liability of the government. And government assets are liabilities for taxpayers like you and me. And the cycle repeats. It's an infinite regress of liabilities. There is no hard asset at the core of our financial system - only claims upon claims upon claims.

Now contrast this to a hard financial asset like gold. When I own gold, it is an asset to me an a liability to no one else. (More on this later.)

Let me repeat. Fiat money has no intrinsic value. It's just a collective hallucination we all agree to uphold.

And because it has no intrinsic value, its market value can easily be manipulated, leading to all sorts of problems. Most socioeconomic problems we are experiencing today is the result of a fiat system.

A unique problem of fiat is that it can easily be debased. Currency debasement is caused by proliferated money printing - whereby the money supply increases relative to the goods and services produced. This results in inflation, and decreases the purchasing power of our dollar.

So how exactly is money printed?

Money is printed through debt creation.

(Makes sense right, since all money is debt?)

This occurs in two main ways:

1. QUANTITATIVE EASING

Quantitative Easing occurs when a central bank buys debt assets like bonds and mortgage-backed securities to hold in their reserves. This expands the central bank's balance sheet, broadening the amount of base money. These reserves then increase the availability of credit to borrowers, injecting liquidity into financial markets. QE allowed $11T USD to flow into the global economy by major central banks following Covid-19. We are now left with inflation and a cost-of-living crisis around the world. Contrast this with Quantitative Tightening (QT), which decreases the central bank's balance sheet and reduces circulating monetary supply.

2. FRACTIONAL RESERVE BANKING

When we deposit money into a bank, they're required to keep only a fraction of our deposits in their reserves. The rest is then lent out as loans. This is a form of money creation as the act of lending multiplies the amount of money in circulation. For example, if Michelle deposits $69,000 at a bank, and the reserve requirement is 10%, the bank keeps $69,000 x 10% = $6,900 in reserves. It then lends out the remaining 90% ($62,100) to kari. Lending increases deposits. The bank has created this extra $62,100 out of thin air, increasing the money supply to $69,000 + $62,100 = $131,100! It's not all peachy though - banks operating with low fractional reserve carry risks of potential bank runs. A run on the bank occurs when there is not enough liquidity in reserves to meet withdrawal requests. In other words, if all depositors tried to withdraw their money, the bank would collapse due to fractional reserves. But okay, get this. US banks have moved from a fractional reserve system to a no reserve banking system as of March 2020!

Money creation is just debt monetisation and credit expansion. 

In case I haven't made this crystal clear yet: fiat money is created out of nothing. These processes theoretically have a stimulating effect on the economy. But the nature of debt is that it eventually needs to be paid back.

Credit is short-term stimulating and long-term depressing. When you borrow money, you are essentially borrowing from your future self. Your future self has to spend less in order to fund your current loan. That's why credit expansions lead to economic bubbles. At the top of a bubble, money is plentiful and cheap due to easily-available credit. The bubble bursts when liquidity tightens and debt burdens grow to the point of unserviceability.

Aside from money printing, central banks have another tool to determine the availability of credit: by controlling the interest rate. Lowering the interest rate increases the availability of credit; increasing the interest rate limits the availability of credit. And so, interest rate levers are another way to manipulate the expansion and contraction of debt cycles.

An extraordinary amount of money was created in the past few years. When the coronavirus pandemic shocked the world in 2020, governments all around the world implemented quantitative easing strategies, kept interest rates near zero, and procured stimulus packages in order to prevent recessions. All we have done is delayed the recession, cheapened our money, artificially pumped asset prices, and created the illusion of wealth.

OUR WEALTH IS MOSTLY ILLUSORY.

Incomes have been steadily rising over the past few decades, yet most people feel poorer today. Why?

We have confused real wealth with financial wealth. 

Real wealth is the sum total of goods and services produced by a society. Financial wealth is a measure of real wealth as denominated in the prevailing currency of that society. As we are now experiencing, financial wealth can be inflated relative to the actual amount of real wealth extant. The illusion arises when we confuse them as the same thing.

Let me explain.

Imagine a world where where avocados are the main currency. And lucky you, you managed to buy a house with 20,000 avocados. Your willpower in not mindlessly consuming smashed avo on sourdough has finally paid off.

Now imagine suddenly a new agricultural technique was developed so that we were able to harvest 20x more avocados. Avocado supply in society explodes. You open your pantry and a pile of avocados comically tumbles out. Everyone has so many avocados! Cool!

You decide to sell your house. Wait a sec. This same house is now worth 500,000 avocados. What??? Did your house become more valuable? Not really - it's still the exact same house as before. The underlying asset is the same, but its value as denominated in avocados has changed since avocados are so much less scarce now. More people have more avo, so people can try and bid for the same house with more of their yummy green currency.

This is how money works. We pay for goods and services by bidding it with our dollars. The transaction is successful at the supply-demand equilibrium.

Economic disorder is the discrepancy between real wealth and financial wealth.

You might be furious that housing is extremely unaffordable. But a house is still a house. The underlying asset is the same. It's that the price of a house has been denominated in a depreciating asset that is the dollar. Our wealth is being stolen from us.

INFLATION IS THEFT.

They say inflation is a silent tax. But really it's also theft. No one asked for the purchasing power of their dollar to be stolen from them. And worse, most people don't understand why it's happening. They just find themselves in a grocery store aisle scratching their heads over the price of Tim Tams.

The reality is that inflation is a great tool for governments to reduce debt burdens. Cash now is worth more than cash after an inflationary bout, so current debts can be paid in the future with dollars that are worth less. Inflation reduces the real value of debts over time. And the only trade-off was the decline of our currency. Wow, how lucky are we?

We now see people blaming corporations and capitalists for "price gouging". We blame our landlords for raising the rent, ignoring their burgeoning mortgage stress. We blame Colesworth for our cost-of-living crisis*, ignoring the fact that our overinflated money supply is the very thing that's allowing us to overbid on a packet of chips. This is what Ray Dalio calls the "anti-capitalist phase" of our current economic cycle.  And while capitalists might take advantage of the situation, the reality is that everyone is scrambling to preserve their wealth in the face of rapid currency debasement. It is only those with financial literacy, pre-hoarded capital, a substantial asset portfolio, positive cashflow, and a moderate risk appetite, who might have an edge (...these people are usually rich capitalists, the scapegoats for our outrage). I firmly believe our outrage is misplaced.

*People outraged over supposed big Aussie supermarket "profits" need to understand the difference between total revenue and net profit margins. Net profit margins for Coles & Woollies has remained at 2-3% for years. Inflation has increased supply costs and it is simply being passed onto the consumer.

Almost everyone is feeling the pinch. The lower class, who garner wealth in the form of income, is being pummelled by inflation. The middle class, who store their wealth in assets leveraged by debt, is being pummelled by high interest rates. However the ultra-wealthy class is probably scrooge mcduck diving into their glimmering investment property portfolios and inherited gold. We are in a painful period of the debt cycle.

Inflation is a very attractive form of silent tax. Why? Because people, esp. the wealthy, fucking hate real taxation. At least inflation allows the financially literate to pre-allocate their wealth in a way that benefits them in this current value restructuring. In the end, the financially-illiterate proletariat-workers lose out.

WE ARE EXPERIENCING THE BIGGEST WEALTH TRANSFER OF OUR LIFETIMES.

The wealth gap is widening at an alarming rate. Liquidity is being transferred from the have-nots (non-investors) to the haves (investors) in the form of various equities. Once the currency floods the banks, the lifeboats are scarce hard assets.

Wealth preservation comes easily to those who understand the mechanisms of wtf is happening.

And here are the secrets of the ultra-wealthy. They have learned to leverage debt by purchasing assets that appreciate faster than the interest rates of their loans. They also discretionally channel their liquidity into appreciating storeholds of wealth. Then they patiently wait as they understand the magic of compounding. They understand that time in the market is usually more important than timing the market. Their investment time horizon is waaay longer than most people's. As Warren Buffett says, "our favourite holding period is forever". They hold because they understand that debt cycles are cyclical with asset prices eventually reverting to the mean on an upwards trend.

Time in the market is the reigning strategy in an economy based on a currency that devalues over time. As such, wealth begins to pool in the ageing population in the form of housing and stock market equities.

We are beginning to live in a caste system - we are either born into wealth or we aren't. Meritocracy is a thing of the past. Does it matter how hard we work if a double-income family struggles to purchase even a shitty home?

Welcome to the era of intergenerational wealth. We rely on the bank of mum and dad. We wait to be gifted inheritances. Inflation has redistributed wealth into the asset-owning boomers, and so said boomer parents have the choice to redistribute again by gifting down to their children. And unfortunately, those who come from a non-investor family are severely disadvantaged. It's messed up. But now that you know how the fiat system works, you can take lil steps towards building value in harder forms of money.

A THRIVING ECONOMY MUST BE BASED ON HARD MONEY, NOT SOFT MONEY.

Hard money is money that cannot be debased easily.

To understand how currencies work, we need to understand the concepts stock and flow. Stock is the total existing circulating supply of a currency. Flow is the amount of new currency created each new period. Hard assets have a high stock-to-flow ratio. This means that the flow rate is relatively low as new stock cannot be easily created. Limited flow is what makes an asset scarce. And scarcity is what gives it value.

Fiat has a low stock-to-flow ratio. There is no immediate cost or restriction to money printing. It is too tempting for central banks to create new money under the guise of stimulating the economy.

Hard money (high stock-to-flow) and soft money (low stock-to-flow) both play a role in economic cycles. Let's sail through the history of money together to understand it better.

The world has experienced three major financial empires since 1600:

1. Dutch Empire (1600-1800)

2. British Empire (1800-1950)

3. American Empire (1950-present)

ALL financial empires undergo the same debt cycle:

• THE RISE. They start out with a strong flourishing economy driven by productivity and innovation. These empires are able to gain rapid power through their strong financial centres, military strength, good education, and low levels of indebtedness. Because of this, their currency eventually becomes the world reserve currency. Their money also starts off as hard money as it is pegged to a commodity that cannot be inflated easily, like gold or silver.

• THE FALL. As the empire grows more prosperous, it eventually reaches the peak of the wave. Decadence and excesses pile up as people become less productive. Financial stresses and political instability brews. The currency eventually de-pegs from its hard asset backing, paving the way for debt expansion. Money becomes paper claims that can be inflated. The money printer is turned on which leads to the eventual debasement of currency into fiat.

The life cycle of money in all financial empires follows the same rise and fall: from a hard asset, to paper claims on that asset, to complete non-backed fiat.

Our view of money is myopic since we live through such a short period of its lifespan. So let's give some more perspective. ~750 currencies have existed since 1700. Only about 20% remain. All of them have been devalued.

Now let's take a closer look at the American financial empire. After the end of WWII, a new monetary system was established called the 1944 Bretton Woods System. Countries all around the world agreed to fix their currency to the US dollar, and the US dollar would be fixed to gold. This was called The Gold Standard, and it set the stage for America to be the world financial centre.

Then on one fateful day in August 1971, President Nixon severed the convertibility of US dollars to gold. And thus the US currency transitioned from a commodity-backed currency to a purely fiat currency.

We are now experiencing the decline of the American financial empire. The US dollar is the current world reserve currency. But its reserve currency status is being challenged. America is $33T in debt. Its debt-to-GDP ratio is 97% (any country with a debt-to-GDP ratio higher than 77% runs a higher risk of defaulting on debts and experiencing economic slowdowns). The American people are angry at the worsening wealth gap, and political polarisation is at an all-time high. By all metrics, the US is at the end of a long-term debt cycle.

I don't know if the Gold Standard is the best economic system. All I know is that currency failure is a real risk in fiat systems.

Historically, when a currency experiences hyperinflation (50%+ inflation p/m), citizens must survive by adopting a harder form of currency. Argentinians are forced to adopt the US dollar because while the dollar is certainly devaluing, it is devaluing at a slower rate than the peso. Are we moving towards a harder form of money than the US dollar?

GOLD HAS HISTORICALLY BEEN THE MOST ENDURING FORM OF HARD MONEY.

Gold's pretty great. Gold has a high stock-to-flow ratio. Its flow rate is historically very steady (1-2% p/a), meaning its value cannot be easily inflated. Gold is intrinsically valuable because of its scarcity and virtual indestructibility. It has been used as a store of wealth and monetary exchange for millennia, spanning several financial empires.

But there is a problem. Gold bars are kind of hard to carry around, divide, and transact with. So gold needs to be abstracted or securitised by a centralised exchange for it to be portable, easily divisible, and salable. Which means the asset is exposed to exchange risk. And as we have seen, it is tempting for financial authorities to de-peg from gold and eventually inflate with unbacked paper claims. Or worse, there might be a run on the gold bank causing it to collapse entirely. We need to place a great deal of trust in an intermediary party to keep our gold-stored value safe!

BITCOIN IS THE HARDEST FORM OF MONEY TO HAVE EVER EXISTED.

Bitcoin is digital gold. I think that's a fairly accurate view. If gold's value is its endurability, scarcity, non-corruptibility, and resistance to supply manipulation, then digital currencies have it beat in every way.

Here's a snapshot of why Bitcoin is hard money:

• Bitcoin's supply is programmatically pre-determined to be capped at 21 million coins.

• It is completely decentralised. No centralised entity like the central bank is able to manipulate its supply.

• The value in bitcoin is trustlessness. We do not need to trust any centralised entity to keep it running. There is no single point of failure.

• When you hold bitcoin, you are holding an asset, not a liability.

But kari, you say. Are you sure Bitcoin is safe?

Do something for me yeah? Go to your family Christmas party and talk about Bitcoin to your uncle. If he's a textbook uncle I guarantee he will call crypto a scam. I will argue that everything scammy in crypto has to do with centralisation.

Take a look at all the crypto collapses in the past few years. FTX. Voyager. Luna. Celsius. BlockFi. These are all centralised partial-reserve run-on-the-banks with a crypto flavour. Sam Bankman-Fried gambled with investor money and lost. TradFi fiat banks are doing the exact same thing now. If depositors tried to withdraw liquidity en masse at any traditional bank, it too would collapse just like FTX did.

Centralisation is the problem, not the underlying mechanisms of crypto itself. And yet the masses are quick to call cryptocurrencies a scam, ignoring the bad faith actors involved.

I'm definitely not saying crypto is risk-free. Actually, it carries a shitload of risk. Bitcoin is still a baby of a currency. But not once in its 14 year lifespan has its consensus mechanisms been successfully attacked. Its decentralised nature makes it anti-fragile. It's a beautiful piece of software. And best of all, old rich bastards can't devalue it at their behest.

But what about bitcoin's crazy stupid price volatility? 10 years ago we could've bought a pizza with 10,000 BTC - now we can buy 3000 pizzas with 1 BTC. Price volatility is the result of low market capitalisation and low liquidity in an asset. As user adoption increases we should eventually see price stabilisation.

WE HAVE A MORAL IMPERATIVE TO BUY A HOUSE, NOT RENT.

Affordable housing should be a human right. We need to take ownership of all areas of our lives, including our homes.

Monetary expansion has made this home ownership dream impossible.

Local out-of-touch property tycoons (or in Australian parlance, "rich cunts") suggest millennials give up avo on toast to afford their own home. But this advice grows more and more outdated as we travel along the fiat inflation trajectory.

So how many avocado toasts do I have to skip to afford a house?

In 1980, the median Sydney house price = ~$64,000 (20% deposit $12,800).

The average price of smashed avo on toast was ~$6.

You'd need to skip 2,133 avo meals to save for a deposit.

If you skip 2 avo toasts a day, you could save up for a deposit in ~3 years.

In 2000, the median Sydney house price = ~$312,000 (20% deposit $62,400).

The average price of smashed avo on toast was ~$12.

You'd need to skip 5,200 avo meals to save for a deposit.

If you skip 2 avo toasts a day, you could save up for a deposit in ~7 years.

In 2023, the median Sydney house price = ~$1,596,000 (20% deposit $319,200).

The average price of smashed avo on toast is ~$20.

You'd need to skip 15,960 avo meals to save for a deposit.

If you skip 2 avo toasts a day, you could save up for a deposit in ~22 years.

So yeah. This skip-the-avo advice doesn't hold up anymore. 

A fiat system strongly incentivises property investment. All capitalists play a game, and the game is this: how can I convert my wealth into business and assets that will increase my future purchasing power? Where can I best park my capital? How can I take advantage of the proclivity for fiat currencies to inflate over time?

Real estate is an immensely attractive investment vehicle in this capitalist game. Here's why:

• Leveraging debt. By leveraging debt you could multiply your yield. Let's say you have $50k to invest. You could plonk it in an ETF which gives you a 10% yearly return - $5k. Or you could use that $50k as a down payment on a $500k house, which appreciates 10% in a year, giving you $50k capital appreciation.

• Capital appreciation + capital gains tax discount. Property investment allows investors to take out a loan on an asset where its value could provide greater capital appreciation than the interest rate of the mortgage. In Australia, there is also a 50% off capital gains tax discount if you hold an asset for more than 12 months.

• Building equity. Paying off the principle of a mortgage allows you to build equity in the house, and acts as a forced savings mechanism. Compare this with renting where you have nothing to show for it in the end.

• Negative gearing. If your expenses in owning an investment property exceeds the rental income, then the investor incurs favourable tax benefits.

Of course, there are other reasons for the astronomic rise in house prices. Low housing supply, high immigration, etc. It's a whole storm of various factors. But I won't dive into it too much because this essay is already way too fucking long (I planned for it to be a quarter of this length!)

People have been calling for a crackdown on property investment in general. But I don't think that's the driving force for our housing unaffordability crisis. Stats show that in Australia under 20% of the population hold an investment property. 90% of these property investors own fewer than 2 investment properties.

What's more worrying is the trend of private equities and large asset management funds buying up single-family homes. We should be worrying about big institutional investors, not small retail investors who are struggling to get on top of inflation.

Now, why am I arguing that we have a moral imperative to own our own home? Because there is nothing more dystopian to me than the idea of having a corporate landlord. Or the increasing rates of homelessness in elderly populations because they have been priced out of the market.

YOU SHOULD KEEP BUYING AVOCADOS.

Clearly the solution is not to forgo avo. Eat the avocado. Get those healthy fats to fuel your brain to think up a solution to this mess.

Housing unaffordability is, to a degree, out of our control. Our inflationary currency has increased the demand for housing. Structural supply shortages have decreased the supply for housing. We are left with a crazy housing boom and a million complaints on r/ausfinance.

On the legislative level, we can push for changes in policies that disincentivise rampant and corporate property investment. People have certainly called for the abolishment of capital gains tax discounts and negative gearing. I'd personally love to see this happen out of pure curiosity of what would happen.

On an individual level, I have some ideas on how we can move forward.

As an agent of the economic machine you have a responsibility to contribute to societal prosperity without fuelling the housing crisis. You have several resources you could use to help you. You have time, energy, and money. What you do with these finite resources has an impact on the world.

Here is my proposal.

First, preserve value. Second, create value.

PRESERVE VALUE

Property is used as a speculative vehicle because it's a great way to preserve capital. I propose that we channel our liquidity into other hard assets that can preserve your purchasing power. This means increasing your portfolio allocation of hard assets like gold and cryptocurrencies.

I have no idea what society would be like if Bitcoin becomes the world reserve currency. The problem with an economy based on pure hard money is that there is little room for growth powered by credit simulation. Hence why eventually all financial empires eventually experience credit expansion.

CREATE VALUE

We can preserve value through investing. But we can also create value through productivity. What if more and more people deployed capital to fund education, productivity, and innovation?

We saw a liquidity boom during the pandemic as governments tried frantically to stimulate the economy. Stimulus packages and debt monetisation are very good for an economy when it is used to fund innovation and education. The problem is that people dumped their covid stimulus packages into non-productive assets like property and crypto, causing fantastic bubbles in both assets.

Before I talked about the games capitalists play. They also play another game: How can I innovate by solving a big societal problem, and get paid for it?

Credit expansion is actually good if the credit is used productively to solve these societal problems. Notice the difference between good debt vs bad debt. Good debt is one that funds innovation, generates enough income to service the debts, and returns extra yield & capital appreciation. Good debt is capital used productively. In this case, both the borrower and lender benefits economically. Good debt fuels productivity and results in real income growth. Bad debt is non-productive and cashflow-inert.

Remember that we should strive to increase real wealth and not financial wealth. In order to create real wealth, you have to create some sort of value in society.

To be honest I don't really see a non-painful way out of the housing crisis. Either the crisis continues and worsens and more and more people are priced out. Or a radical shift occurs to burst the bubble, in which leaves millions of hardworking taxpayers in great financial ruins. Oh well. Just continue to live the best you can, hug your loved ones more, and enjoy an avocado once in a while :)