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Some Money Making Magic from 1944

As a real estate investor it's important to know the basics.

You need to have a long term goal for your real estate business.   You must decide on some strategies.   And you need to figure out what tactics to use.

For example, "I want to create $10,000 a month in cash flow so that I can focus on my true passion and I'm using a combination of single family homes and commercial real estate with long term leases in growing communities to do it."

Having a blueprint for your business is key.

But there's something that's often missed.

And it's a big deal.

Too many investors ignore anything outside the world of real estate.

In the past we've shared how important it is to know how the economy works.  How things like interest rates and inflation can monkey with you assets.

Why it's important to understand the impact of changes to banks overnight lending rates.

And there's something else you should know.

You must know how currencies work.

Why?

Well if you're investing in Canada but plan to retire in Tuscany, Italy it's a big deal.

Let's say you invest in some nice cash flowing Canadian real estate.  It goes up in value 50% over 10 years.

Now...

What if the Canadian dollar loses value against the Euro over that same time period.

You think you've made 50% on your money and you're planning to use that cash to help you buy that dream villa in Tuscany.

But when you go to convert those Canadian loonies to fancy dancy Euros you realize that you're losing out because the Canadian dollar has lost value against the Euro.

You're $170,000 Canadian dollars no longer gets you the $100,000 Euros.

It only gets you $75,000 Euros.

Not good news for your Tuscan getaway.

So currency is a big deal.

Get it?

The example above isn't any kind of forecast, just an example.

And to be clear the Canadian dollar is likely in much better shape than the U.S. Dollar right now.

But there are ways to make currency forecasts for yourself if you know what to look for.

And we need to start at the beginning.

It's really important for you to know what some old guys did in 1944.

We believe it's impossible to have an understanding of how the economy works without knowing what these "gentleman" did in 1944.

Ready for it?

Great, let's go...

Right near the end of WWII a bunch of dudes representing 44 countries got together at Bretton Woods.  Somewhere in New Hampshire.

The goal...

To figure out how to make trade and finance work after the war.  The U.S. was sitting on a ton of gold at the time and had a much stronger economy than anyone else.

ASIDE:  Interestingly enough, the U.S. is still reporting that it's the single largest owner of gold bullion in the world.  The Eurozone countries own slightly more as whole but individually no country owns more.

It was decided that they would fix the rate of exchange for all currencies against the U.S. Dollar.

And the U.S. Dollar would be redeemable in gold at a rate of $35 per ounce.

So....

An fixed amount of foreign currency could be exchanged for a fixed number of U.S. Dollars and that amount of U.S. Dollars could be exchanged for an ounce of gold.

Read that line again, just one more time.  Let it sink in a little.

This was the Bretton Woods Agreements of 1944.

Then came 1971.

In 1971 President Nixon was facing large debts because of the deficit spending (government spending more money than they collected in taxes).

Things like the Vietnam war, the "Space Race" with Russia and various other domestic programs caused the government to spend more money than it had.

And the gold backing of the U.S. Dollar was causing a problem.

Although the U.S. could print more money at will they ultimately had to be aware of the deal they made in 1944.

Which was ... a certain amount of U.S. dollars had to be paid out in gold to foreign central banks if they demanded it.

Well, this was a problem.

Why?

Because the U.S. wanted to keep printing more and more dollars to pay for stuff.  But if anyone came knocking on their door to redeem those dollars for gold they would have a problem.

There wouldn't be enough gold to pay everyone who came a knockin'.

So what did they do?

In 1971 President Nixon closed the "gold window".

He pulled off a masterful magic trick.

Just like that gold was gone from the equation.

That meant the U.S. dollar was no longer convertible to gold by foreign central banks.

Bam!  That was a big deal.

In that single move it meant that all foreign currencies, including the Canadian Dollar, were no longer backed by gold.

At that moment all currencies were backed only by the U.S. Dollar.  The U.S. Dollar was the official reserve currency of the world and it was backed by nothing.

Cool eh?

There's a lot more to talk about here but let's get to the point.

What does this mean to you today?

Well it means that economies are "managed" by central banks who use things like interest rates and inflation "targets" to control their economies and their currency's value.

That's the only thing they have left.

Those are their tools of the trade.

If the dollar goes up in value too much it can affect exports of Canadian businesses so the government may bring in a weak dollar policy to try and reduce that value.

And if the currency falls too low it's difficult for Canadian businesses to import goods from other countries.  It may also be difficult for Canadian companies to invest in their businesses with productivity tools available from other countries.

So a super low dollar value isn't a good thing either.

Ah, what a battle.

And if the Bank of Canada feels the economy is slowing they rush more money  into the economy to get things moving.

This ultimately results in higher prices for goods and services.

And it "de-values" the currency.

You need more dollars to buy the same "basket of goods" than you did years earlier.

If they feel the economy has run away inflation then they jack up interest rates to try and control it.

Now...it's not always that simple.  And things don't always go according to plan.

How can you plan for this?

Study, educate yourself.  Read, listen, learn.

Find people who are "in the know" and hang around them.

There are monumental changes going on in global monetary policy right now.  The U.S. announced this week that they would do more "Quantitative Easing", which is a fancy way of saying "Monetizing Debt", which is a fancy way of saying "money printing out  of thin air".

Should this scare you?  No.

But you want to be an insider and know what's going on so that you can protect yourself and profit from it.

What happens to Canada, our interest rates and our cash flow and our properties will have a direct relation to what the U.S. does.  The global economy has never been so interdependent.

These are interesting times and we'll be watching closely...you should too!

Until next time ... Your Life. Your Terms.

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0 comments on “Some Money Making Magic from 1944”

  1. One of these days the world will wake up and realize that gold is also backed up by not much. And the price can be anywhere between $35 and $3000 depending on how much emotion you are willing to invest in it. It is just a perceived value and perceptions change.
    Great article!

    1. Todor, Gold is backed up by its scarcity. Gold has always been the reserve currency for human history, simply because it takes a huge amount of human labour to pull it out of the ground, you cant just make gold appear! gold production has never increased more than 2% a year, thats why its called gods money. Through out history every time an empror messed with gods money the empire collapses.

      Asif

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