1. What’s Going on with Nvidia and Tesla Stock?
Nvidia and Tesla, the darlings of Korean investors, have recently taken a hit in the stock market. The key culprit? Optimistic U.S. economic data. While this sounds like good news, it triggered fears that the Federal Reserve (Fed) might hold off on cutting interest rates anytime soon. Investors, spooked by the prospect of prolonged high rates, started selling, driving the stocks lower.
2. A Quick Throwback: The 1907 Panic to the 1929 Great Depression
2.1 The 1907 Knickerbocker Crisis
- What Happened?
Back in 1907, the collapse of the Knickerbocker Trust Company triggered a financial panic in the U.S. Unlike today, the Federal Reserve didn’t exist, so private banker J.P. Morgan stepped in. - The J.P. Morgan Fix:
Morgan famously hosted a marathon meeting at his New York home, corralling bankers and government officials to stabilize the financial system. His effort worked, but it highlighted a major issue: America couldn’t keep relying on one man to fix national crises.
2.2 The 1929 Great Depression
- FRB in Place, Yet Ineffective:
By 1929, the Federal Reserve was up and running, but it failed to prevent the Great Depression. This massive economic collapse devastated not just the U.S. but the global economy, leading to a chain reaction of financial ruin across countries. - The Bigger Picture:
Germany’s economy crumbled under the weight of this global downturn, paving the way for extreme political movements like Hitler’s rise to power and eventually World War II.
3. 1971: The Year That Broke the Rules of Money
3.1 What Was the Gold Standard?
- Basic Idea:
Under the gold standard, money was tied to a country’s gold reserves. In the U.S., for example, 1 ounce of gold equaled $35. This system acted as a natural brake on excessive money printing.
3.2 Nixon’s Big Move
- The End of the Gold Standard:
In 1971, President Nixon shocked the world by severing the link between the dollar and gold. This bold decision marked the end of the gold standard and the birth of what we now call “modern capitalism.” - What Changed?
With no gold backing, money could be printed freely, ushering in a system where capital could grow exponentially without physical limitations.
4. Why Interest Rates Matter More Than Ever
4.1 Balancing Capital and Labor
- Production’s Key Players:
Economists often talk about the three factors of production: land, labor, and capital. But in reality, land is just another form of capital. The real game is between labor and capital. - Labor vs. Capital Income:
While labor income grows linearly (e.g., an hourly wage), capital income compounds exponentially, thanks to interest rates.
4.2 Interest Rates as the Brakes
- Keeping Capital in Check:
Interest rates are like brakes for runaway capital growth. They slow things down, ensuring the economy doesn’t spiral out of control. - Maintaining Balance:
Without interest rates acting as a counterweight, labor income would lose its footing entirely, and capital would dominate, destabilizing the entire system.
5. Life After 1971: The Age of Infinite Money
- Unlimited Money Printing:
Once the gold standard was gone, the theoretical limit on money supply disappeared. This opened the door to unlimited money printing but also raised concerns about inflation. - The Decline of Currency Value:
The more money in circulation, the less each dollar is worth. This devaluation impacts everything from daily purchases to long-term savings. - A New Economic Reality:
While some still focus on GDP growth or population numbers, these metrics don’t fully capture the dynamics of a post-gold standard world. Capitalism now operates on a different set of rules.
6. Why 1971 Should Always Be on Your Radar
The year 1971 wasn’t just another date in economic history; it was a turning point. By removing the gold standard, Nixon set the stage for the free-wheeling, capital-driven economy we know today. However, this system comes with its own challenges—most notably, maintaining balance between runaway capital growth and the needs of the working class.