#8 Broken Money Broke Investing

Stocks serve an important function in our society, but that function was fundamentally broken by the distortion of the medium-of-exchange, unit-of-account, and store-of-value that underlies our economy.


Historically, money (gold), was an excellent store of value. That changed in the past century at great cost to prices as illustrated above. This is the depiction of the destruction of the store-of-value and unit-of-account function of money in modern times. It’s led society in general to store their wealth not in money, but in stocks.

A 100 year history of stock prices in the USD unit-of-account explains clearly why holding USD long term would be a poor choice, especially in the last 5 decades:

Stock number go up.

But let’s take another look at that same chart in the historical unit-of-account that society used for thousands of years, gold:

Both charts look quite similar in the first half, but understandably look quite different post-1971, because they are the same chart up until that ominous year, but not after.


Investment in a sound business should return to the investor rewards in the form of dividends and price appreciation. Reciprocally, investment in unsound businesses should punish poor capital allocators. Importantly, these rewards come at the expense of risk, risk that one is either allocating capital in the former category or the latter.

Arguably, parking your retirement wealth in an index fund is somewhere in between these two categories, arguably this is not investment at all, it’s blind capital allocation en masse, it’s forced malinvestment, a simple result of the incentives at play.

Modern economists and central banks target inflation by increasing the supply of money encouraging people to “invest” rather than save. Inflation discourages saving:

Since 1971, collectively as a society we have encouraged more risk, less savings, more capital allocation, less discretion in that allocation, more malinvestment, less sound investment, distorted price signals, and in the humble opinion of this writer, broken both investment and money simultaneously.


Book of the Month:

The Dao of Capital: Austrian Investing in a Distorted World

“Blaming wild market volatility on the “animal spirits” of the herd mentality takes the focus off where it belongs: on the actions of the government. Instead of functioning as instruments of information, signaling to entrepreneurs how and when best to serve consumers, interest rates are perpetually manipulated by central bank actions to the point of meaninglessness. Artificial changes in interest rates become a deceptive feint by which entrepreneurs succumb to malinvestment, because they believe there are more resources (i.e., savings) in the system than there really are. Monetary policy insidiously plays with our time preferences and our very ability to engage in economic calculation. The greater the distortion, the greater destruction needed to correct it.”

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