Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better
Book Author: Lyn Alden
Broken Money is a book about how money works and has evolved over time. The author, Lyn Alden, looks at the evolution of money, starting with people trading shells, why gold and silver worked so well together, and our current fiat system with ~190 unique currencies. The later portion of the book looks at the future of money in a digital era.
The book’s core argument is that technology has affected money in unavoidable and, in retrospect, predictable ways. For example, in past eras, we had a gold system; however, trade would only settle once the gold could be physically moved. Hundreds of years ago, traders found ways to abstract gold to facilitate trade, reducing the time between the transaction and settlement giving rise to the earliest forms of credit and banking.
Once the telegraph was invented in the late 1800s, the time between transaction and settlement drastically changed. You can now trade at the speed of light, but moving gold moves at the speed of matter (and back then, it was ships and stagecoaches). This put us on a path that led us to the current system of nearly instantaneous transaction and settlement (the gap between trade and settlement in the cryptocurrency Ethereum is less than 12 seconds, for example).
Broken Money spends the middle portion of the book explaining the more recent history of money, starting with the Depression of the 1930s. Most importantly, the author walks the reader through the financial history of the current era, which has been dominated by what she calls “Monetary Dominance,” and how we are starting to transition to an era of “Fiscial Dominance.”
In short, Monetary Dominance occurs when central bankers (interest rates, money supply) dominate the outcomes of the economy. For example, the Fed raises interest rates, and the banks lend less money, thus causing a recession but taming inflation. Fiscal Dominance occurs when budgetary policy (taxes and government spending) crowds out monetary policy and has a stronger economic effect. As the book title suggests, this transition period will be bumpy as our current framing of money is broken. Specifically, most nations have moved from privately held to publicly held debt, and the debt-to-GDP ratios are too high for the central bank to raise rates effectively. This leads to the gradual debasement of the currency as fiscal deficits compound the problem every year. Japan was the first country to make this transition almost twenty years ago; however, most developed countries have been in the transition period since the 2008 financial crisis and the 2020 COVID crisis. The result is that the economy will start to look like the period from the late 1940s and 1950s when there was tremendous fluctuation in inflation and interest rates.
The book discusses how emerging technologies and their differences can improve the financial system. Considering how much technology has affected the evolution of money, this discussion, while speculative, was the most insightful.
Why I Recommend This Book
Broken Money is very well-researched and written. Lyn takes a balanced approach and explains money's past, present, and future in simple and straightforward terms. It is both fun to read and very informative.
I recommend this book to everyone because it is thought-provoking. The conventional wisdom about the economy today is that now that COVID-19 is behind us, we will go back to “normal” soon. Normal means something very different to different people. For someone under the age of 40, it may mean 0% interest rates. For someone between the ages of 40 and 65, it may mean monetary dominance. For someone over the age of 65, it may mean the gold standard.
Lyn does not try to predict what will happen next but instead offers tools to aid in the transition. In addition, by looking at the past, we can squint and see the future. We all must prepare for the changes that will soon come to the global economy.
