Tariffs or not tariffs... That is the question.

Welcome to Trump's wonderland.

Well, this was a busy week.

Let me clear the air first: No, the world is not going to end in a financial apocalypse. Yes, Trump knows about the possible consequences of his actions; and no, his advisors aren't... Haha.

Anyways, let me take a break again. I know I promised you "the easy way" for getting financially literate, and I am willing to hold my end of the bargain. So, let's pick up from where we left off last time.

First things first: if you haven't read the last issue, please visit:

Last week, we covered what money was and how its fundamentals work. Now, in order to fully comprehend why this turmoil happens, we need to understand the terms "big boys" use for the amount of money in circulation.

The Money Supply

Does that term give you chills? Believe me, it should. The money supply simply refers to the sum of money people and—in some cases—institutions hold in their possession. The simplest thing you need to know is, money can be in various forms. Although—as per almost all financial terms—the money supply has a lot of technical details, most of them you don't need to know. Central banks across the world use different notations while addressing the money amount like M0, M1, M2, M3, and more. While the difference between these terms is mostly determined by how liquid (how easy to convert it to cash) the money type is, believe me, you don't need to know which is which. All you need to know is, it is free for governments to print money.

Well, except for inflation. Hold that thought. We'll come back to that.

You know, printing money is not just about some machine non-stop issuing bills. Of course physical money is important as ever—yet it's just... physical. And expensive. The real deal is non-physical cash-printing, which is mostly... free?

Okay. Let's assume that you deposited your money to your bank. That action of yours automatically gives your bank an initiative to use your money... as a line of credit to give its customers. Wait, I know what you think. You think that "Okay, whatever, the bank of course uses my money." The thing you don't know is, the bank doesn't only use your money, it also leverages it. Yes. The ratio always changes in accordance with central bank regulations, but let's say, as an example, if you deposit 1000 USD to a bank, it mostly leverages it tenfold. Yes. Your 1000 USD has magically converted into 10k now. Good job!

I can almost hear you think, "okay, how is that even possible?" Well, in fact it is quite simple. Since almost everything is digital, the money you have is mostly just a digital registry. Think about it. You use your credit card for your expenses. Whenever you need to purchase something big, like a car or house, you wire the money. Demand for actual cash is getting lower and lower.

So, do you understand now how "bank runs" tend to ruin banks so easily? Most of the banks are highly leveraged and they just can't provide the cash they owe at any given time.

This is straightforward fraud, you say. What did you think was happening in the financial world?

The Inflation

The idea behind creating credit lines simply means issuing money by private banks. The central banks? They are designed as a "last line of credit". That's why you, even if you are the best samaritan, can't get a line of credit from your central bank. Only your private bank can do that.

Year after year, central banks have held low interest rates. Also with the help of deregulation, they made it easier and easier to get a line of credit. Creating that much money caused inflation. Remember: more money in the market means less value for the money.

Here is official M2 money supply data of U.S. (This chart doesn’t include some types of money, yet it is so horrendous, it doesn’t matter anymore).

You see, it was around 4 trillion USD in 2000. Now? It is around 22 trillion USD. Under normal circumstances, the amount of money needs to increase in accordance with the growth rate of the country, or else the money will be too valuable—recession. But this...

This graph is showing you one of the reasons that costs of your livelihood keep increasing. This chart is the validation of the credit boom, hence the inflation authorities are trying to hide. Governments/banks creating money from thin air means they are taxing you—without you realizing it.

You can't hide the prices, can you?

Okay, since this is settled, let's get to...

The Tariffs

Being the sole owner of the world's reserve currency simply means you can tax the whole world if you want, without the world realizing it. How? Simple.

Remember the banks are creating money from thin air? Okay. Now think about it, after a certain point, the surplus of money in your country will be so huge that the inflation cannot be contained anymore. So, what to do? Simple. As the owner of the reserve currency, urge your citizens to consume. More. Urge them to buy products from other countries.

Then buy stuff from abroad, send your excess money to foreign countries. Yay! Just like that your problems disappear along with surplus money. Also let your big companies move their expensive operations abroad, pay wages and spend money there. Since you are the sole owner of the currency, who cares?

This is where hell started to break loose. The excessive USD was starting to come back to U.S. for years now, since China and Japan are primarily funding U.S. Government debt. U.S. using the power of their reserve currency to fuel their growth started to backfire, since the world was full of excessive cash and the cash is now returning back to U.S., causing more and more inflation and also making it more and more expensive for the U.S. government to function.

This is what Trump and his board saw. This is what they are trying to fix. Reducing excessive public jobs, cutting some expenses and trying to control the beast, the debt of U.S. government.

Can it be contained? Hardly. What if they raise tariffs and stop Americans from spending money? Also by cutting rates and flooding the market with money, making the reserve currency less and less valuable to diminish the U.S. debt?

This is a plan which only can be devised by evil-wizard Gargamel.

Yeah, it works. All the time(!).

Unless you issued a presidential decree in order to hedge your government by purchasing cryptocurrencies with limited amounts?

Damn.

See you next time!

P.S. Since the tariff wars is the most pressing global issue and we've got it covered, there will be no other news this week to discuss.