Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
Today, we have questions on central bank digital currencies (CBDCs), how the Fed’s bond-buying works, and how best to invest in the commodities needed for the New Energy transition…
So let’s get started…
First up, Mitch is worried that some of his money will disappear if and when it is converted to a government-issued digital currency…
Gathering all the information I can on the possible CBDC. What are your thoughts on savings accounts? My biggest concerns are in the event this happens, an exchange rate would have to take place. Would it be concrete to say the digital currency would be a fair 1.00 USD to 1.00 CBDC?
Anyone traveling understands what happens at customs exchanges at the border – say, Canada, for example. The rate, both positive and negative, takes place in and out of a foreign country. And I believe “sleight of hand” profiting takes place during said transaction.
I have little faith in our current government being honest when this occurs. I’m thinking of moving my life savings, but it is an impossible amount to hide. Your thoughts please.
– Mitch B.
Hi Mitch, I understand your concerns. To your point about the exchange rate, I do think the aim of a CBDC would be a 1-1 with the U.S. dollar.
I also think central banks would figure out a way to extract fees. Just as regular folks have to pay transaction fees (and also exchange rates when they buy or sell something in another currency).
With regards to your savings, that’s a personal decision. Only you know what access you need to what you have to live the life you want.
But what I recommend, in general, is keeping them across different institutions, not all in one place. The key is to know what you have and how to get a hold of it.
I do this myself because I don’t trust any single institution with all my money.
As for the shift to CBDCs in general, this won’t happen overnight. It will be incremental. And there are steps you can take today to safeguard your wealth as it happens.
If you’re interested in learning more about that, I just recorded an urgent video presentation to help you end up on the right side of this shift.
In it, I go into more detail on what a digital dollar could mean for our financial system, for regular Americans, and for our money. To watch it – for free – just click here.
Next, the massive hike in the Fed’s assets courtesy of its quantitative easing (QE) strategy comes up regularly in my essays. Since 2008, its assets have ballooned from $1 trillion to nearly $9 trillion. Reader Thomas R. wants to know more about how it all works…
Hi Nomi! I am really glad that you have become a member of the Legacy team. You are definitely helping myself and many others to understand how the financial system works… or works against us!
Anyway, here is my question: I can’t for the life of me understand how any money is created when the Federal Reserve buys bonds from the banks.
So, the Fed creates money to pay the banks for these bonds. But how do the banks get these bonds in the first place? Don’t they have to pay the Treasury for them? Or are they just given to them free of charge?
If the banks have purchased and paid for these bonds, the Fed is simply giving their money back to them. This all depends on the banks actually paying the Treasury for these bonds.
The only way this could create money is if the Treasury sells its bonds to the banks on credit, and when the Fed subsequently buys them, the banks then pay the Treasury.
In other words, the Fed is the one actually buying the bonds indirectly from the Treasury with created money! The banks are just a shell to pass the created money to the Treasury.
Of course, if this is what happens, the banks would not end up with any funds at all. Not even on the Fed’s books. So, this is not what happens, is it?
Again, where do the banks get the money to pay for the bonds that the Fed buys in the first place? I am right back where I started!
– Thomas R.
Hi Thomas, thank you for your question. It’s certainly a head-scratcher, on many levels. But I’ll try to explain it as simply as I can…
The U.S. Department of the Treasury borrows money by issuing a Treasury bond and agreeing to pay interest on that bond in return.
Treasury bonds are considered high-quality bonds, given that they have the implicit backing (what’s called the “full faith and credit”) of the U.S. government.
The banks are given a portion of each new bond issuance to sell to customers – usually pension funds, corporations, and money managers.
And when I say “given,” I mean “allocated” by the Department of the Treasury. The big banks are considered “primary dealers.” They act as middlemen or brokers to the types of institutional customers I mentioned above.
Usually (but not always), the bigger the bank, the bigger the allocation.
And when the banks sell those bonds, they get a fee.
They can then do what they want with the money they get from the pension funds, etc. They don’t have to return any of that money to the Department of the Treasury. It’s basically free money to Wall Street.
The Department of the Treasury doesn’t keep its own bonds, however. The idea is to sell them and pay interest on them to the end holders, whether that’s the big banks’ customers or the big banks themselves.
The banks can also keep, or hold, some of the bonds they are given on their own books to sell at a later date. They would choose to do this if they wanted to keep some of those bonds on reserve at the Federal Reserve in case of emergency or crisis.
Technically, though, as we’ve seen, the Fed pays extra money in the form of quantitative easing (QE) in return for the bonds.
This means the Fed “buys” these bonds from the banks in return for cash it has fabricated out of thin air. With a few keystrokes on a computer, it transfers that fabricated money to the bank.
So the Fed adds real bonds to its book of assets. And it adds fabricated money into the banking system.
It’s really that simple… and that crazy.
It’s a triangle. The government “borrows” money through issuing bonds… the banks are the middlemen that sell those bonds (for a fee)… and the Fed is one of the main buyers.
I hope this helps you understand the intricacies of the Fed’s quantitative easing (QE) monetary strategy, Thomas. It’s all part of the Fed’s smoke-and-mirrors management of our finances. Thanks again for the great question.
Finally for this week, Terri B. is interested in investing in the commodities that will drive the New Energy transition…
Hi Nomi, any chance you could do an essay for us about the rare earth minerals that will be needed for the transfer to clean energy and electric vehicles (EVs)? Could you please include which stock, ETF, etc. you would choose to invest in?
I remember reading about palladium. But I cannot remember where I saw it and what exactly it will be used for. Thanks!
– Terri B.
Hi Terri. Thank you for writing in.
I actually did an essay about rare earth elements (REEs) and their uses several months ago. There are 17 in total. And they are used in everything from iPhones to electric cars, flat-screen TVs and computers to sophisticated military equipment.
These include neodymium (Nd) and praseodymium (Pr), which I wrote to you about more recently. The two are vital components in some of the 21st century’s leading New Energy technologies, including EVs.
And in May, I wrote about what the U.S. is doing to secure its supply of rare earths. That’s crucial, because right now, China is responsible for almost 60% of global rare earths output. U.S.-China relations remain fraught. And the U.S. government knows it needs to secure alternative supplies, preferably on home turf.
As to how to invest in REEs, while I can’t give personal investment advice, the exchange-traded fund (ETF) I highlighted in all these essays is the VanEck Vectors Rare Earth ETF (REMX). It’s a straightforward REE investment you can access with a regular brokerage account.
It holds companies involved in producing, refining, and recycling rare earth and strategic metals and minerals. So, it gives you broad exposure to the REE industry.
REMX is also the most tradable ETF in the REE arena. That’s because it invests in the biggest and most liquid companies that generate at least half of their revenues from the global rare earth and strategic metals space.
While on the topic of metals needed for the EV revolution, let me take the opportunity to remind you about some other essays I’ve written recently.
Last month, I wrote about two other metals that stand to benefit from the growth of the EV market – lithium and nickel. And in both essays, I showed you simple ways to invest.
Lastly, you asked about palladium… I haven’t written specifically about this metal yet. It’s a precious metal, just like gold, silver, or its sister metal, platinum… not a rare earth.
Palladium is highly valued for its wide range of industrial, medical, and electronic applications. But the biggest demand sector for palladium is “auto catalysts” in car exhausts, which reduce polluting emissions in internal combustion engines (ICEs). These account for about 80% of palladium demand.
But palladium has no place in an electric vehicle. That’s because EVs are emission-free. So, as the world shifts to EVs, the demand for palladium may fall gradually in the years to come.
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins