The movement of money

Wednesday, 30 November 2022 — Albert Park

[7 min read]

Dear Reader,

The critical question is not whether one form of money may prevail over the others, although that is crucial to understand, but what impact any of these forms of money could have on investor portfolios if it either emerged triumphant or sank beneath the waves of electronic competition.

Investors tend to think of their portfolios as consisting of asset classes such as stocks, bonds, real estate, or commodities. They forget that those assets are valued in currencies. Extreme changes in currency valuations can have as much impact on portfolio values for better or worse as the fundamentals of the assets themselves.

We will prepare investors for developments in the future of money so they can preserve wealth and prosper, not just through asset selection, but through selection of the proper currency in which to buy and sell assets and hold cash. There’s a lot to unpack. One thing we can be sure of is that the future of money will not resemble the past.

Central bank digital currencies as a form of money

Central bank digital currencies, or CBDCs, are different to cryptocurrencies such as Bitcoin [BTC], although the differences are often overlooked. CBDCs may be issued by central banks, but they are not new currencies. They will still be dollars, euros, yen, or yuan as they are today. Only the format and payment channels will change.

CBDCs will be digital only; there won’t be any paper money or cash allowed. Balances can be held in digital wallets or digital vaults without the use of traditional banks. A blockchain is not needed; the CBDC ledger can be maintained in encrypted form by the central bank itself without the need for bank accounts or money market funds. Payments can be made with an iPhone or other device, with no need for credit cards or costly wire transfers. CBDCs are coming fast and may be the future of banking and payments.

But there’s a dark side. If there is no cash, there is no anonymity. Governments will know your whereabouts and habits at all times simply by tracking your use of funds through the CBDC payment system. This can already be done to some extent by tracking credit card transactions, but the CBDC system will make State surveillance far more pervasive.

Money without banks

A reaction to the proposed change has already begun. Major banks fear they will be completely disintermediated in the payments system. It may be the case that individuals will have their own personal accounts at the Fed from which they can pay or receive funds with the wave of an iPhone. Who needs bank accounts, cheques, account statements, deposit slips, and the other clunky features of a banking relationship when you can go completely digital with the Fed?

Mastercard and Visa are also concerned that their payment channels will be made redundant. An individual Fed account on your mobile phone could eliminate the 2.5% fees that merchant acquirers charge retailers to process your credit card transactions. Payments, in general, would be faster, cheaper, easier, and more secure than they are today.

Investors need to take these developments seriously. There’s more at stake than just customer convenience. Trillions of dollars of wealth in the form of financial institution stock prices of companies such as JPMorgan, Citi, Mastercard, and Visa could be wiped out as the new digital payment technology takes hold.

SDRs as a form of money

Most monetary observers know the Fed has a printing press and can print dollars. The European Central Bank has a printing press and can print euros. The same is true of other central banks around the world. They can each print their home currencies.

But far fewer know that the International Monetary Fund (IMF) has a printing press also. They can print a kind of ‘World Money’ called the Special Drawing Right (SDR) and hand them out to the 190 countries around the world that are IMF members.

This is rarely done. It was last done in several tranches in 2009, both in response to the 2008 global financial crisis and to compensate certain members who had missed earlier allocations. Before that, the last issuance was in 1981.

However, the IMF is now moving quickly to issue new SDRs to help reliquefy the world in the wake of the pandemic panic and recession. The IMF has recently provided the latest details on this coming issue of freshly printed SDRs.

The current consensus among the top countries in the IMF — basically the G20, which includes the G7 plus China, Brazil, India, and some other major economies — is that the new issue should be equivalent to US$500 billion. However, as much as US$650 billion could be issued without further approval from the US Congress. (The US is the largest member of the IMF and has veto power over certain major IMF actions.)

A new role for the SDR

Changes in the IMF issuance process may already be in the works. These can include special allocations to poorer countries; right now, the allocations are in proportion to your IMF capital account, which means richer countries like the US get more than poorer countries. It is also possible for the IMF to issue SDRs to non-member entities, such as the United Nations, to be used for climate change programs.

After decades of sleeping on the sidelines, it looks like the SDR is ready to wake up and assume a role as a new major reserve currency controlled not by the US, but by the IMF executive committee, which includes China as a powerful member. This process will take time, but it has now begun in ways that are different from prior SDR allocations.

At a minimum, this expanded global money supply has some inflationary potential. Beyond that, the SDR may finally be ready to emerge as a rival to the US dollar as the reserve currency of choice for China, Russia, and the developing world.

Look out for the next and final instalment of this series of articles where Jim ties up his thoughts on currency and gives his opinion on what he believes to be the ‘future of money’.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

Dear Reader,

It was a Thanksgiving weekend to be remembered.

The family gathered at the house on Wednesday and Thursday morning. The little grandchildren came racing in…coughing and sneezing. They pick up the latest fads and fancies at school…and the latest germs too.

The French say visits from grandchildren follow a pattern — ‘ah’…and then ‘ouf’. Grandparents are delighted to see them arrive. Later, exhausted, they are delighted to see them leave.

It’s not a good idea to leave children and grandchildren, in-laws, friends, and friends of friends sitting in an enclosed space together for too long. The conversation is bound to take a wrong turn. Trump, COVID, Ukraine, Paul Pelosi, wokeism, sexism, racism, or one of dozens of other isms, not to mention the discipline, or lack thereof, of the children present…

…there are plenty of subjects that could cause trouble.

It was partly to head off conversation, and partly for his own amusement, that your editor had prepared an activity. Each year, he aims to focus attention on a particular farm project. One year, he replaced a barn roof. Another Thanksgiving ended with cords of firewood stacked up to the eaves.

This year’s project was building a gypsy wagon.

The right angles

Hardly had we begun than we began to feel suspicious of gypsies. What was the matter with them? What did they have against right angles?

Still, as a family project, the gypsy wagon worked marvellously well. One son and two sons-in-law worked together on it and seemed to enjoy the work. And the grandchildren, too, had fun climbing up and down onto the wagon…and playing with the power tools when we weren’t looking.

Dorothy, especially, was helpful. The six-year-old handed her grandfather tools and then checked his measurements. Her little tape measure, however, had come from Ireland. So, while grandad measured in feet and inches, Dorothy went metric.

Meanwhile, the kitchen was a hubbub of activity. A Thanksgiving meal is a major enterprise. Pots and pans — laying neglected in a cupboard for an entire year — were pulled out and put to use. Every surface was covered with sauces, potatoes, leeks, chestnuts, and, of course, a turkey that looked like it had been crossed with an ostrich.

Women dominate the kitchen — at least, in our household. Thanksgiving is, after all, a feast. They hustle about. They bustle. They exchange information, each with her own recipes, techniques, and habits. One works in a spotless kitchen at home. Another is a carefree cook. To an outside observer, the kitchen is a pandemonium of sights, smells, sounds, and chatter. But somehow, the women — old and young — come together and synchronise their efforts to prepare a masterpiece dinner.

It was into this bedlam that little Dorothy came with a message.

‘Grandma, can I tell you something?’

‘Not now honey, I’m just putting this in the oven…in a few minutes.’

Dorothy went back out to the gypsy wagon, where her father and grandfather were finishing the roof struts.

Of sturdy stuff

The key to the gypsy wagon is the frame. In this, we were lucky. We have kept an old four-wheel hay wagon in inventory for half a century. It was parked in a barn and used only as a place to pile unused lumber and old tools. Miraculously, the rubber tyres only needed to be reflated…and it could be pulled out in the open.

The platform of the wagon is made of sturdy oak, as were the cross beams. We simply removed about a foot from each side, reducing the width from eight to six feet.

But perhaps we should answer some questions. We will deal with the ‘why?’ first.

‘Why do you want a gypsy wagon?’ asked a friend.

‘Well, it’s a handy thing to have. You can use it for an emergency bedroom…or a quiet place to work.’

We didn’t mention that it might be useful at future Thanksgivings…as a refuge from the convivial joy of the occasion.

‘Also, if you do it right, it’s a nice thing to look at…like a lawn folly that you can move around for a change of scenery.’

Our farm is an old tobacco farm, where no tobacco has been planted for at least 40 years. It’s on the spine of Anne Arundel County and drifts down to the low tidewater area near the bay. (We are privately hoping that global warming raises the sea level so that we can keep a boat in front of the house.)

Out across the fields behind the house, where the flat land begins to dip toward the bay, is an ideal spot for a picnic. The perch, with its commanding view, must have attracted Indian tribes as well as early settlers. There, we find arrowheads from the former and bits of broken brick and pottery from the latter. On a clear day, sometime in the future, we will sit on the steps of the gypsy wagon and see the Chesapeake sparkling in the distance.

After about 15 minutes, Dorothy ventured into the kitchen again.

‘Grandma, can I tell you something?’

‘Sweety, I’ve just got to get these chestnuts peeled. Let’s talk later.’

Back at the gypsy wagon, the ‘how?’ questions came next; as in, ‘Do you know what you’re doing?’.

The answer was, alas, right in front of us. The rounded roof struts, cut with a jigsaw, wandered up and down like a bad haircut. The side walls, meant to lean out from the base at about an 80-degree angle, seem to have had ideas of their own. And the old plywood, recycled from a torn-down barn, looks unworthy of a genuine gypsy wagon.

‘This is a homemade gypsy wagon,’ explained a son, ‘made by gypsies who tell fortunes and steal puppies. Not carpenter gypsies.’

‘Is that a form of hate speech?’ asked a visitor.

‘I think it was a joke,’ we interrupted.

‘Yeah, well…gypsies are always victims of discrimination. We have to be careful how we joke about them.’

The culture wars are hard to avoid. Even on the jobsite, there is always a risk of ambush.

That conversation went no further.

After a few minutes more, Dorothy headed back to the kitchen, and repeated her message.

‘Grandma, can I tell you something?’

‘Sure…tell me.’

‘Grandad fell off the wagon and broke his leg.’

Regards,

Bill Bonner,
For The Daily Reckoning Australia

PS: Grandad did not really fall off the wagon or break his leg. But Dorothy thought it would be funny if he did.