Money Without Boundaries

Chapter 7Pillar 1 – Modern Portfolio Theory and the Risk-Free Asset

“The circulation of confidence is better than the circulation of money.”

– James Madison

Before we move on and start putting these pieces together, let's review what we've learned so far.

In Chapter 1, we learned that since 1971, when President Richard Nixon announced the US dollar would no longer be convertible into gold in international markets, currency has been backed only by the considerable power of the US economy, or “full faith and credit.” While our currency has underlying economic value, it doesn't have any real value because there's no limit on supply, and this “just trust us” era brought on the instability and inefficiency that make the global financial system so vulnerable today.

In Chapter 2, we learned that “full faith and credit” suffers because it has no anchor, and the dollar has therefore drifted endlessly. We saw that money is nothing more than an illusion or a conversation about much more than currency and dollars. We learned the difference between narrow money, which is easily convertible into cash, and broad money, generally anything of value that resembles money. And we learned about A. Mitchell Innes's Credit Theory of Money, which asserts we're all both debtors and creditors of each other and that if an entire community's debts and credits could be set out against each other, every merchant who paid for purchases with bills and every banker who issued notes were in effect issuing ...