The nuance between money and currency is more complicated than most people think, yet it’s imperative that you understand the difference if you want to protect your wealth over the long term from inevitable market corrections. I use the word inevitable because every single currency throughout history, and there have been thousands of currencies, has crashed at some point and returned to a Gold standard.
The fundamental difference between currency and money is a concept known as “Store of Value.” Your real value, or wealth, is your time and your energy. Real money acts as a tool to store your time and energy over a long period of time, or until you’re ready to use it. Currency fails to be a store of value because the supply of the currency changes and is essentially controlled by reserve banks and governments. If the currency supply doubles, your hard-earned dollars halve in value. When the Greeks started adding copper to gold coins thousands of years ago they inadvertently created a currency that eventually collapsed their economy with an abundance of worthless copper coins.
Today we are witnessing the effects of currency expansion. Make no mistake, it’s hyper-inflation by governments trying to solve their problems by spending and printing money. When looking at Figure 1, you can see how the currency supply in Canada has nearly tripled since the year 2000, and this is not an isolated event; it’s an international phenomenon. The US in particular has printed more money in the past 10 years that in its entire history.
The effects of inflation are especially noticeable in real estate. Real estate prices rise perfectly in sync with the supply of currency as people look to invest their newly printed currency in assets, thus the rapid rise of stock and real estate prices over the past decade.
We often assume supply and demand is the main driver of real estate prices. However, when looking at Figure 2 —which shows the actual and projected population growth of Toronto—prices do not seem to be rising with demand when you consider that the average home price has doubled over the past 7 years, while population growth over this time has been in the low teens.
The first step to figuring out your game plan for the inevitable correction is recognizing inflation for what it is. The pendulum swing from real money to currency and back to real money has historically occurred over a 40-year period. The Gold standard was completely dropped in 1971, so we are well past the 40-year mark now. The real indicator to me is the reckless real estate investing behaviour we are seeing in Canada lately, which is a clear sign that too much currency is in circulation.
A CIBC/Urbanation study revealed that half of all new Toronto condos had been purchased as rental investments, 44% of which were a NEGATIVE cashflow for the investor. Not to mention that the average pre-construction condo is selling for substantially more than newer resale condos. These are clear signs investors are playing a dangerous game, especially when you consider many investors tend to leverage one investment into the next, i.e. remortgaging a home to buy a pre-con condo, leveraging that condo to buy a rental property, etc. That’s the behaviour that sinks investors and crashes markets.
“Corrections and crashes create huge opportunities, and the biggest transfer of wealth that will occur in our lifetime will be when the market returns to real money.”
Ensuring each investment is not highly leveraged with a positive cashflow and ample wiggle room for a correction should be obvious, but clearly some people are oblivious in this market. Warren Buffet’s saying: “Be Greedy when others are fearful and fearful when others are greedy” should be every investors mantra. These days, it seems to be falling on deaf ears.
The good news here folks is corrections and crashes create huge opportunities, and the biggest transfer of wealth that will occur in our lifetime will be when the market returns to real money. In the meantime, play the inflation game responsibly and buy real estate that makes sense. While I personally don’t see Gold saving the day as it did in the past, a modern cryptocurrency, like Hashgraph, might be the answer. Then again, a few Gold bars might still be a good insurance policy.
If you are looking for houses or Toronto condos for sale with good fundamentals, reach out and I will gladly connect you to one of our local neighbourhood experts who can help you navigate this market.
Watch Mike Maloney’s “Hidden Secrets of Money” – Episode 1: Money vs Currency