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Governments are moving towards digital currencies - got gold?

Commentaries & Views

The debate on central bank digital currencies (CBDC’s) has been heating up since the COVID-19 crisis began. The reference to a ‘digital dollar’ in an early draft of a U. S. legislation for the first $2 trillion financial stimulus package announced in March, along with the subsequent ‘Banking For All Act’ bill put forth by Senator Sherrod Brown (D-OH), has fueled this debate.

However, before the crisis began, monetary authorities in many countries had already taken steps towards cashless societies. These steps include abolishing large denomination bills, imposing ceilings on cash transactions, introducing declaration requirements on the carriage of cash in and out of the country, reporting requirements for cash payments exceeding a specified amount, and even taxing cash transactions.

In fact, a 2019 study by the Bank for International Settlements (BIS) revealed that central banks representing one fifth of the world’s population have said they are likely to issue the first CBDC’s within the next few years.

When a sizeable portion of the Indian populace was following the initial excitement during the very crucial U.S. presidential elections in November of 2016, Indian Prime Minister Narendra Modi suddenly appeared on television screens and announced that 500 and 1000 rupee notes will no longer be legal.

The move at the time was said to be aimed at solving the problem of counterfeiting banknotes, as 500 and 1000 rupee bills represented 20% of the cash value in circulation and 80% of cash outstanding. But this stunning move by India’s Prime Minister also laid the groundwork for the Reserve Bank of India to eventually eliminate cash and launch a Digital Rupee, which is currently in the research stage using blockchain technology.

Earlier this year, France and South Korea specifically launched experimentations to test use cases of their CBDC projects.

A few months later, in a bid to reshape its economy by beginning one of the biggest real-world trials for the e-RMB, China confirmed that it had rolled out a pilot of its digital currency in four of its cities. The Republic of China appears to be leading the race to develop the first major digital currency, but the digital yuan is not a cryptocurrency like bitcoin. Instead, it is issued and controlled by the People’s Bank of China, the country’s central bank. 

Shenzhen is one of the four Chinese cities that has begun internal testing of the digital yuan. Recently, nearly 2 million individuals in Shenzhen signed up for the lottery. The 500 winners can now download a digital renminbi app to receive the digital yuan and spend it at over 3,000 merchants in a particular district of Shenzhen. The world’s second largest economy also plans to use the e-RMB at the 2022 Beijing Winter Olympics. 

Although China appears to be leading the major currency race to go digital, Brazil began its own experiment with localized digital money in 2014. Maricá, near Rio de Janeiro, has been using its own digital currency, called the ‘Mumbuca’, to fund one of the world's largest basic income programs. Citizens of Maricá pay with Mumbuca through debit cards that contain a scannable barcode, while there is no need for low-income families to require purchasing a smartphone. 

Earlier this month, the European Central Bank (ECB) took a step closer to launching a digital version of the euro currency shared by 19 countries, when it issued a comprehensive report outlining the reasons why it might need to take this step. The ECB also said it would hold public consultations on the idea with citizens, academics and bankers.

Then earlier this week, the International Monetary Fund (IMF) held a virtual panel that discussed digital currencies and cross-border payments. Roughly 80 percent of central banks in 66 countries, including 21 advanced nations, are exploring the issuance of digital currencies, while 40 percent have become pilot programs or experiments, including the Federal Reserve, the IMF panel noted.

The panel was hosted by the IMF managing director in Washington, DC, Kristalina Georgieva, and Federal Reserve Chair Jerome Powell participated. Powell talked about the impact of a U.S.-issued CBDC and how it could affect financial stability.

“We do think it’s more important to get it right than to be first and getting it right means that we not only look at the potential benefits of a CBDC, but also the potential risks,” Powell said during the panel discussion on Monday. “And also recognize the important trade-offs that have to be thought through carefully.”

In a leadup to this event on October 15th, Kristalina Georgieva released a speech oddly entitled ‘A New Bretton Woods Moment’. Under the Bretton Woods System created in 1944, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. The Bretton Woods System effectively came to an end in August of 1971, when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

Moreover, the speech began with a reference to John Maynard Keynes, who is the father of the current fiat monetary system that is defined as a currency established as money by government regulation. While Keynesian economists are attempting to monetize the worst sovereign debt crisis in human history, gold is benefitting from Keynes’ great influence in economics and policymaking.

What global central banks fail to mention in these reports, speeches, and meetings, is their realization of no possible way governments of major economies can continue to borrow at these absurdly low levels of interest rates.

Central banks are afraid to raise interest rates for they assume the economy would plunge. Yet, they are also looking at the national debts that governments never intend to pay off. If they raise the rates and the government budgets explode, then that comes back as a political disaster.

However, the greater problem is that all past debt cannot be continually rolled over, as there have been no buyers in most cases but the banks themselves. Since introducing a negative interest rate policy in January of 2016, the Bank of Japan (BoJ) owns between 70% and 80% of the ETF bond market in the world’s third largest economy.

While going to negative interest rates in 2014, the ECB has also destroyed its bond market in just 20 years from the launch of the euro in 1999. These central banks cannot shrink their balance sheets for there is no market for the debt. The only way out is to default on all debt, and they may do this by declaring it to be perpetual with the simultaneous launch of digital currencies to prevent bank runs.

The issuance of perpetual bonds would still be the reserves of central banks, with no intention of making them redeemable. The market will already assume the bonds are AAA because they will not default, while being paid interest on them like an annuity. This would allow central banks to escape the formal default which is inevitable.

Due to the failure of these negative interest rate policies to stimulate either the European or Japanese economy, the Federal Reserve has been steadfast in not attempting to implement a negative interest rate policy on the world’s reserve currency.

However, the Keynesian reflationary actions by both the U.S. government and the Fed are paving the way for citizens to eventually lose faith in the monetary system. All lines that are supposed to separate these two organizations are being eliminated by the introduction of Modern Monetary Theories (MMT), while the pretense that the Fed is independent of the government has openly been dropped.

The only option for governments has been to adopt their Modern Monetary Theory, for it has become impossible for central banks to use interest rates to stimulate the economy when governments themselves are the biggest borrowers.

Central banks continue to lower interest rates hoping to stimulate demand, while governments are hunting taxes and becoming more aggressive in tax enforcement. The two sides are clashing, while the central banks are now trapped into using dangerous text book theories being rushed into practice on real world economies due to governments shutting them down.

Moreover, while some significant problems and concerns have been raised, the biggest practical problem would be a power or communication outage. Since any discussion of digital currencies from governments suggests replacement of cash, the system would cease to operate during a hurricane.

I fail to see how the adoption of major currencies turning digital will benefit the average citizen besides ease of use. CBDC’s will just create increased government intervention and surveillance, while making it easier for governments to implement taxes and roll increasing debt loads into perpetual bonds during the greatest debt monetization in history.

Of course, the most important reasons for governments to go digital is to make it more difficult for people to park money away from the eyes of income tax authorities, while eliminating hoarding and bank runs. In short, digital fiat would take yet another freedom away from citizens by giving the issuer complete control over currencies.

Even though I cannot store it on a flash drive, I still prefer holding analog gold as a hedge against the continued malfeasance and irresponsibility of government. And apparently, so do central banks according to the World Gold Council, as they have been the largest buyers of physical gold. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access
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