Updated 4.8.2023 15:54
Understanding The Past to Understand Our Future
In 1971, President Richard Nixon made a decision that would forever change the global economic landscape: he took the dollar off the gold standard. This move, known as the Nixon Shock, ended the era where the value of the dollar was directly linked to gold, and it has had far-reaching implications for investors, particularly those interested in acquiring assets through debt.
The Nixon Shock: A Historical Perspective
Before 1971, the dollar was pegged to a price of gold set in 1946, at $35 an ounce. This system made the dollar overvalued, making U.S. exports expensive for other countries to buy, and imports cheap. The U.S. suffered its first trade deficit of the 20th century. With inflation on the rise and a gold run looming, Nixon’s team enacted a plan that ended dollar convertibility to gold, effectively severing the link between the dollar and gold. This decision was initially presented as temporary, but it became a permanent fixture of the global economy.
The Power of Debt in Asset Acquisition
In the post-gold standard era, the concept of leveraging debt to acquire assets has become a powerful tool for wealth creation. This strategy, known as “gearing,” involves borrowing to invest in assets that are expected to increase in value over time. For instance, taking out a mortgage to buy a rental property is a common way to use debt to build wealth.
This is just one example revolving around this idea. By leveraging the bank’s money to purchase an asset, you can potentially generate a significant return on investment. Since the dollar has been severed from the gold standard, the concept of using debt to acquire cash flowing assets becomes ever more important. See below the rise in U.S.A debt since the 1970’s.
The Importance of Cash Flowing Assets
In a world where the value of the dollar is constantly fluctuating, investing in assets that produce cash flow is crucial. These assets, such as cash-flowing real estate and investment portfolios, generate consistent income over time. They not only provide a steady stream of revenue but also offer a hedge against inflation and currency depreciation. The goal of investing for income is to generate a reliable cash flow from your assets at low risk, making them an essential part of any robust investment strategy.
Looking to The Future
Understanding the historical context of our current economic system, particularly the shift away from the gold standard, is crucial for today’s investors. By leveraging debt to acquire assets and focusing on those that generate cash flow, investors can navigate the challenges of a depreciating dollar and build long-term wealth.