Welcome to our Friday mailbag edition!

Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.

Up first today, a question from reader Stan on a central bank digital currency (CBDC) being used to pay off the federal debt…

What are your thoughts on the $36 trillion Fed debt and the CBDC coming? What would keep the Fed from taking money out of our accounts to help pay it off? I heard everyone in the USA would need to pony up something north of $76K.

– Stan D.

Hi Stan, thanks so much for that question.

The U.S. national debt has certainly been spiraling upward. And there are a lot of big numbers floating around when it comes to our total overall debt and how that debt breaks down per every single U.S. citizen.

So, first, I want to give you an accurate picture of those staggering numbers based on up-to-date information. The U.S. Treasury Department keeps regular reports on the size of its debt and interest on debt payments.

And you can always check how that debt breaks down per person and other statistics through this website. Though I have to warn you, it’s not a pretty picture…

Now, the total U.S. federal debt has increased by about 33% since the pandemic. And the U.S. government just abandoned a cap on that debt for two years, so it’s only going to grow from here.

As of writing, our national debt stands at more than $32 trillion. The interest alone on that debt per year is $607 billion.

That puts the ratio of our federal debt relative to our economic growth at more than 121%. What this means is that we are now borrowing $1.21 from the future for every $1 worth of economic growth we have today.

Compare that ratio to about 52.7% in 1960, 34.61% in 1980, and 57.4% in 2000. To put that into perspective, the debt burden for every taxpaying American is $95,000 per citizen each year. That’s the number you get when you divide the amount of outstanding debt at this moment by the total number of taxpayers.

In theory, to pay off all of our outstanding federal debt, each citizen would need to write a check for $95,000. And not all citizens pay taxes (think minors). So when you really consider the numbers, it’s more like $257,000 per taxpaying person each year.

Let’s step away from those numbers to get to the heart of your question. Can the Fed use a CBDC to take money from people’s accounts to help pay off that debt, or even the interest on that debt?

Here’s how I see it:

A CBDC could certainly provide a direct link between anyone’s bank account and the Fed. A CBDC would be a programmable currency. That means that its very existence would involve keeping track of information in a digital format, such as debt payments or taxes owed.

So, in theory, the Fed or government could program that CBDC to extract a portion of your account and use that as a direct payment toward U.S. debt. What could also happen is that every transaction you make could be taxed an amount designated directly toward paying the U.S. debt or interest on that debt.

But there are two things to keep in mind:

1) You already indirectly pay down part of the U.S. debt or interest on that debt in the form of taxes. The U.S. Treasury Department collects taxes as revenues.

These revenues are used to pay for things like defense, social security and Medicare, and building infrastructure. They are also used to pay annual interest on our debt. The problem with our country is that we keep borrowing more than we produce.

In other words, we don’t produce enough revenue in the form of taxes or economic growth to pay off our debt. So we keep borrowing more.

A CBDC would make it “easier” for the government to directly extract taxes from your bank account to pay off the U.S. debt or interest on that debt.

2) Congress would have to vote to increase taxes before the Fed could take extra money from your account. The Fed couldn’t just decide to do that by itself in the context of our current tax legislation.

Keep in mind that the U.S. government can already dip into your bank account, or garnish your wages from it, when you are late on your taxes. So that route already exists.

So yes, a CBDC would make that route easier, as I mentioned above. But also, the extent to which it’s used depends on tax law, not the Fed.

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Next, reader Paul wants to know if the government could write off some of its debt during the conversion process to a CBDC…

During the conversion process to a CBDC, wouldn’t it be the perfect opportunity for the government and the Fed to write off some of the government debt? For instance, whatever amount of government debt that is sitting on the Fed’s balance sheet. Maybe far-fetched, but why not?

– Paul B.

Hi Paul, thank you for that excellent question. I don’t think it’s really that far-fetched at all.

Here’s why…

The Fed is sitting on nearly $8.4 trillion worth of debt. It holds this debt because of a process called quantitative easing (QE). That’s where it prints money, and gives that money to the banking system, in exchange for bonds that banks are holding.

In theory, the way to unwind QE is for the banks to give the money back to the Fed and retrieve their bonds.

But the banks have no interest in that happening. They want to keep the money!

The other way to unwind QE is for the Fed to let bonds “roll off,” meaning they don’t print more money to buy new ones when the ones they hold mature. They are currently in the process of doing this. And it’s a slow process.

The final way is for the Fed to sell bonds directly into the market, which it isn’t doing.

You see, if the Fed could just “get rid” of that debt and have it paid off, it could then print more money to buy more debt when there’s a new crisis – like a bank failure, another pandemic, or a war.

(Of course, as it stands, the Fed has no legal limit on the amount of money it can print anyway, and a CBDC would make the process much easier as we’ve discussed here before.)

So, your question is a logical one. Why wouldn’t the Fed use this opportunity of connecting a CBDC and the FedNow payment system to write off the debt on its books?

Well, first, Congress would need to pass legislation to allow the Fed to do that. Currently, the only money that the government can legally extract from your bank account is to pay taxes or fees on taxes that you owe.

If we are talking about paying off the specific debt, or bonds that the Fed holds, then Congress would need to pass new laws to accommodate that process.

And there’s something else. It comes down to the fact that the government bonds on the Fed’s books don’t really belong to the Fed. They are there for safekeeping through QE. That’s because when the Fed prints money to buy bonds from the banking system, the banking system can use that money any way it wants.

It’s like you giving your garage junk away for cash. Do you really want that junk back? No – you want to keep your cash.

Those bonds on the Fed’s books are technically only collateral for that money. But they officially still belong to the banks. So the Fed can’t really pay these bonds off directly, even if it wanted to… and even if a CBDC could be programmed to make that happen.

I hope that helps answer your question.

I absolutely appreciate you sending me all of these sorts of questions, even if you think they might be far-fetched. When it comes down to CBDCs, none of them are.

Finally, our last question this week comes from Donna, who wants to know if states prohibiting CBDCs will affect the federal government…

I live in Florida and our governor has signed a law, like many other states, that says they will not accept a central bank digital currency. How does this affect the federal government from rolling this out or my money?

– Donna P.

Hi Donna, thank you for your question. The truth is, many pieces of the CBDC overall puzzle are still in flux.

I believe the battle between individual states and the federal government about CBDCs will become more prominent in the months ahead. But we also have to keep in mind that the banks are part of the CBDC story as well.

At the end of the day, the biggest national banks in the country get to decide whether they want to work with the Fed on converting everyone’s existing bank accounts into Fed accounts that are denominated in a CBDC.

Banks can benefit from playing ball with the Fed when it comes to a CBDC. The largest benefit is that if they get into trouble, or need emergency liquidity, the Fed will provide it.

We have seen this happen time and time again, from the financial crisis of 2008 to the latest failures of Silicon Valley Bank and First Republic. You see, if the Fed’s only going to provide liquidity or help in the form of a CBDC, banks will want to keep that option open.

So, on that basis, I’m afraid there’s not much that a state can do to stop banks that operate nationally from doing this.

Now, if you are banking with a local or state bank, that could be a different story. A local bank could decide to opt out of the CBDC-centric system if it wanted to.

However, what a state can do is this: It can prohibit the state treasury from considering CBDCs a viable form of money, or currency, in that state.

That’s what Florida Governor Ron DeSantis did, last month, when he signed Senate Bill (SB) 7054 into law. In particular, SB 7054 prohibits the use of a federally adopted CDBC in Florida by excluding it from the definition of money within Florida’s Uniform Commercial Code.

Those bills were designed to protect Floridians’ personal finances and privacy from government and corporate scrutiny.

Other states besides Florida are currently considering similar measures, too. Those include Louisiana, Alabama, Texas, and North Dakota. They have all drafted bills against a digital dollar.

Alabama’s bill, like Florida’s, would also “prohibit any state or government local agency from accepting CBDC as a form of payment.” And I’m sure more states will join them as the path towards a CBDC becomes more apparent.

States could ensure that they can’t be paid in CBDCs. So for the purpose of tax collection or any fines levied by the state, CBDCs could not be used. But a state can’t really do much to stop corporations from moving money in and out of the state in the form of CBDCs.

Now, if every single state banned CBDCs, that would be a different story. That would make it more difficult for banks operating nationally to circumvent those restrictions.

But absent that circumstance, we could see real banking fractures happening between states that prohibit a CBDC and ones that allow it to count as currency in their states, and which banks and corporations chose to operate in those states. This is something that could be playing out for years, though.

And that’s all for this week’s mailbag. Thanks 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].

Happy investing… and have a fantastic weekend!



Nomi Prins
Editor, Inside Wall Street with Nomi Prins

P.S. A CBDC is closer than you might think, and the first domino is set to fall on July 31…

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