Money is an idea backed by confidence – RTK

In his book, Robert Kiyosaki attributed the quote that “Money is an idea backed by confidence” to his mentor (rich dad).
the full quote being:

money is an idea backed by confidence, representing work truly done and is exchangeable.

Robert Kiyosaki

Anyone involved in finance can agree on this quote. It does extend beyond money, it does extend to company shares, bonds, cryptocurrencies, art, and most types of assets. Once confidence is lost, the asset loses it’s value.

To focus on money, confidence is important for 2 reasons:

1- The 1944 Bretton Woods agreement that pegged the USD to gold. It was nullified by Nixon removal of the USD from the gold standard in 1971. Thus since then the USD and all currencies were no longer based on any traditional storage of value, but rather on government actions and policies.

2- The Bernanke doctrine. “The US government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost.” “Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation.”
This quote by Ben Bernanke then Chairman of the Board of Governors of the United States Federal Reserve, means simply that the money printing press goes brrrrr. Joke aside, governments/central banks can print (or digitally issue) whatever amounts they want.

For the above 2 reasons, you realize that the entire monetary system is hanging on a very thin line, which is confidence.

When money as an idea is no longer backed by confidence:

Many countries have seen their currency sink like a rock in a lake, losing 90 and up to 99% of the value due to hyperinflation. Such scenarios happened lately in Lebanon, Syria, Sudan, Venezuela, Zimbabwe…. Often the currency tumbled was initiated by external factors like sanctions and so on. The real reason these currencies tumbled is because the population lost confidence in the money used. Market supply and demand kicked in when many locals wanted to get rid of these currencies. And often the drop in value made central bankers print more to allow the governments to pay the public sector employees etc…
In many other cases, the drop in value can be sharp but not lead to hyperinflation, especially if the government manage to salvage the monetary situation, like in Turkey, Russia, Egypt, Sri lanka etc..

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Abdallah Alaili

I'm a serial entrepreneur (mostly tech) and micro-investor (tiny), this is a blog to learn from other entrepreneurs and spread the wisdom to many more. You can find me on: Instagram - Twitter - Linkedin - more about me