When money can magically materialise, the consequences can be extreme.
By Staff Reporter
This week three pieces of news show just how extreme.
If you are self-employed, own a business or an entrepreneur I strongly urge you to read this. It’s a little long but worth every minute of your time I promise.
When money can magically materialise, the consequences can be extreme. This week three pieces of news show just how extreme:
The first is the tragic story of 20-year-old student Alexander Kearns.
Alexander committed suicide at a railroad crossing after thinking he’d lost $730,000 while learning to trade options on the RobinHood market trading app.
He saw a negative $730,000 cash balance – a glitch in RobinHood’s interface half-way through an options trade. Thinking he’d actually lost that much, he wrote a letter to his parents: “If you’re reading this, I am dead. The puts I bought/sold should have cancelled out too, but I also have no clue what I was doing in hindsight… I only thought I was risking the money I actually owned. f**k Robinhood.”
He actually was only risking the money he owned (and he had actually made a profit in his account) but before anyone could explain it to him he had taken his life.
They were just digital numbers on a screen, but it was enough to drive a young man to his death.
The second story is of the arrest of Wirecard CEO Markus Braun.
He had magically created $2 billion in cash on the Wirecard balance sheet that was meant to be in a number of banks in the Philippines, but when auditors checked, it wasn’t there and apparently never existed.
Wirecard was one of Germany’s big Unicorn success stories. It grew to be worth 24 billion Euros and replaced Commerzbank (previously Germany’s second-largest bank) in the Top 30 companies in the country. Since then, Wirecard’s shares have crashed 99% from 191 Euros to 12 Euros – a loss of $25 billion in market value.
German financial regulators called the situation a “scandal” and a “disaster”. As in the case of Robinhood, it was magic money made up of digital numbers from a few keystrokes.
The difference (other than the extra zeros in the amount), was while the first was bad design with a tragic outcome, with Wirecard it was deliberate fraud. Which is why the CEO was first fired, then jailed. As a result, today Wirecard has filed for insolvency.
The third story is headlined: “A $10 Trillion Fed Balance Sheet is Coming”.
Bloomberg has reported that the US Federal Reserve has seen its balance sheet explode from $4 trillion in March to $7 trillion now and an expected $10 trillion within the year.
Is the Fed printing three trillion dollar bills? No. The $3 Trillion is created in exactly the same way as the first two stories. A few keystrokes and the digital numbers appear as a brand new 3 trillion.
The Fed then sells these numbers on to bondholders who then deposit these money-digits in banks. The banks then add these digits to their balance sheet. Both as an asset in the form of cash, and as a liability as a debt payable back to investors. They then re-loan that money out using “fractional banking”.
Up until March, they could legally loan ten times that amount. Which means as long as the banks had a billion in cash, they could loan out ten billion. This was because the Fed has set a reserve requirement of 10%, where banks have to have at least 10% of what they loan out sitting in cash.
What happened in March? As the crisis hit, the Fed reduced the requirement from 10% to ZERO. That’s right. Banks no longer have to have any cash against the money they loan out.
All these three stories are about exactly the same thing: Magic money.
In each case, no value was created. No product was sold. Money just showed up as digits on a screen.
In the case of Robinhood and Alexander Kearns, the number was less than a million. It was a temporary balance calculated by the app that was accidentally misunderstood and led to a tragedy.
In the second case of Wirecard and Markus Braun, the number was two billion dollars. It was a deliberate act to mislead investors and today Markus is in jail and his company is bankrupt. Because companies aren’t allowed to just magic up money.
The third case is the US Federal Reserve and the number is three trillion and counting. But as they control the money system, what they do is totally legal. No one died. No one got arrested.
But the trouble is, when the magic money on a screen turns to real money in real life, it turns up as debt. And that debt still needs to be paid back.
So what do we learn from this?
The first lesson is that there is no such thing as making money. Only the government can make money. (Unless you’ve created your own cryptocurrency)
The second lesson is that governments are clearly making a lot of it. We’re living in a massive mountain of magic money.
Today the amount of actual currency is US$1.7 trillion.
If you add current accounts, that grows to $37 trillion (95% digital). That’s called ‘Narrow Money’.
If you add ‘Broad Money’ – which is mutual funds, money market securities and saving deposits, you’re now up to $90 trillion (99.9999% digital)
And if you add derivatives, cryptocurrencies and other investments, you’re up to $1.2 quadrillion – Which is a thousand trillion. Of which real money is a tiny per cent of a per cent.
The third lesson is: by knowing this if you’re an entrepreneur or investor, the question isn’t how to make money.
Because you can’t and you don’t need to.
There’s already so much of it.
The question is: “How to attract it?”
And the answer is: By creating value.”
Money is always looking for a home. Everyone who has it is looking to spend it, or invest it, in return for value.
Value can be what someone wants, or needs.
It can be what keeps money safe or keeps it growing.
Almost always, value is what solves a problem better than others.
Right now, in this crisis, we’re seeing enormous destruction of value. But we are also seeing more problems than ever.
So change your focus from making money to attracting money.
Change your focus from chasing value to creating value.
And change your focus from selling products to solving problems.
As Albert Einstein said: “Do not try to become a person of success but try to become a person of value.”
As Grant Cardone says “Who’s got my Money”
This post is written in honour of Alexander Kearns, who never got to learn this lesson.
May he rest in peace?