The ‘Upside Down’ Financial World: What Exter’s Pyramid Teaches Us

The Netflix series “Stranger Things” introduced us to the “Upside Down,” a parallel dimension that is hostile to the human world and inhabited by monsters like demogorgons and Vecna. These two worlds are linked through portals the main characters use to uncover the mysteries of this parallel dimension. Amazingly, this story of the Upside Down shares a number of similarities with our current financial system.

Think of the Upside Down as the derivative markets of our financial system, and instead of a demogorgon, there’s a debt monster.

How the Upside Down is like our financial system

While the origin of the Upside Down is largely unknown, we know the origin of our problems began when the U.S. left the gold standard and moved to printing money. From there, it was just a matter of time before greed, corruption, and incompetence would permeate our financial markets.

While derivative markets were intended to provide benefits such as risk management and increased market efficiency, instead they have become a dangerous place for third-party counterparty risk, speculation, and market manipulation, among other negatives. Derivatives are financial instruments that derive their value from an underlying asset, such as a stock, bond, commodity, or currency.

Take precious metals: there is a physical gold market and derivative paper gold contracts; however, in what can only be explained as a case of the tail wagging the dog, the paper market controls the price of the physical metal. Like the Upside Down, this derivative market seeks to take over our world.

Exter’s Pyramid

Approximately 50 years ago, economist and former central banker John Exter saw these issues and warned of a deflationary collapse of the financial system due to the U.S. moving from a gold-based monetary system. He warned that the “I O U Nothing” of paper or fiat currency would fail and the top-heavy pyramid would collapse under its own weight, returning us back to gold.

John Exter created a model that utilized an upside-down triangle as a visual to provide a hierarchical representation of the financial world, with the most secure investments, such as gold and U.S. Treasury bonds, at the bottom and the least secure investments, such as speculative stocks, at the top. Gold and other monetary metals remain at the point of the pyramid because they have zero counterparty risk.

Exter highlights that derivatives of gold increase the risk of failure, collapse, and bankruptcy. The further you are from a base or real money, the more likely a lack of confidence can lead to default, liquidation, and a collapse of the underlying collateral. Meaning, if one asset class collapses, the financial implications of that crisis will flow down the pyramid as people run to safety and try to protect their money. The further away you are from paper money and gold, the harder that becomes.

Adapting the pyramid

Over the years, numerous people have updated or adapted the pyramid to include more details than Exter’s original drawing.

My favorite version comes from Gold Silver Pros because it goes one step further by relating Exter’s pyramid to asset classes.

Regardless of the iteration, Exter’s Pyramid helps investors understand the relative risk the further you move from gold. It also explains why so many of us struggle financially because we tend to start with the riskiest investments when we have the least knowledge and skills. That only makes the inverted pyramid an even more powerful visual.

READ: The Benefit of Having More Time Than Money

So how can we succeed in a derivative-heavy financial world? We have to: