By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
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 Linda on the global status of the U.S. dollar, as well as the safety of our money in banks…
1) If/when Russia and China agree to trade in the yuan instead of dollars, what will happen to the U.S. dollar? Will Saudi Arabia abandon trading in the dollar? Will Europe?
2) Is our money safe in banks? We are hearing that the U.S. will go to digital dollars. Is this true? If so, will our dollars be useless?
– Linda M.
Hi, Linda. Thanks for writing in!
That’s a lot of yes-no questions, so let me preface my response by saying that there is no crystal ball to tell us how any of this is ultimately going to play out. Anyone who says otherwise is misinformed or, frankly, lying to you.
At the same time, I’m aware that many of our readers share these concerns. So let me address most of this as best I can.
Let’s start with your de-dollarization question…
I’ve actually written about this on more than one occasion in these pages (see here, and here), and, inspired by your questions, may write about this more soon.
But here’s my overall take.
China’s yuan is indeed often cited as the closest contender to the U.S. dollar’s long-lasting reign as the world’s primary currency.
But I think this theory misses an important point.
For a currency to become popular, it has to be safe, have a stable value and market depth, and have the ability to move without restrictions.
With China taking more steps to open its $20-trillion bond market to foreigners last year, the market-depth issue may soon be put to rest. But the yuan still doesn’t meet any of the other standards I mentioned.
China’s capital controls complicate the international use of the yuan. And as long as the Chinese Communist Party is in power, there will always be questions of trust and transparency.
But what about Saudi Arabia?
As I’ve explained previously, the country played a crucial role in maintaining the U.S. dollar’s world reserve currency status. That happened when President Nixon unpegged the dollar from the gold standard in 1971.
I’ll be honest…
If Saudi Arabia begins conducting its oil business with China in yuan, it would be a smack in the face for the dollar.
Those sales would lend significant weight to the yuan worldwide.
But you have to remember that oil-producing countries need to be able to invest all the money they receive for their exports. They need deep and transparent capital markets. They also need the ability to move money in and out of a country easily.
And no matter how many yuans you have, you can’t easily use or invest them anywhere outside China. Here’s why…
While China has made great strides in internationalizing its currency, it’s still far from being a world reserve currency. According to recent data from the International Monetary Fund, only 2.69% of foreign exchange reserves are currently held in the yuan.
Finally, unlike the U.S. dollar, the yuan is not a freely convertible currency. Meaning, its value is not determined by the market forces of demand and supply. Instead, its exchange rate against other currencies, including the U.S. dollar, continues to be managed by China’s central bank.
This goes back to my earlier point about the issue of trust. With China, that’s just too big a political risk for anyone to take. And it’s why the yuan hasn’t caught on with international investors.
To be sure, China’s efforts to undermine the U.S. dollar’s status as a global reserve currency are worth paying attention to. But it’s not something that will happen overnight.
Until their currency can meet the three criteria above, the biggest threat to the U.S. dollar remains the Federal Reserve.
But if you’re still concerned, I suggest that you look into putting some of your hard-earned cash into gold.
Remember, this precious metal is the ultimate form of wealth insurance. It has preserved wealth through every kind of crisis imaginable.
The best way to buy gold is with a combination of physical gold and gold stocks. You can buy physical gold online through accredited places like the U.S. Mint.
I actually just wrote a piece detailing the best places and practices to buy physical gold. If you didn’t catch it, read up here.
You can also buy a gold exchange-traded fund (ETF) that is backed by physical gold. Gold ETFs offer the advantage of holding gold without the hassle of storing, securing, or transporting it. (I covered this in more detail in a recent mailbag issue.)
Now, onto your remaining questions…
Is your money safe in banks?
It depends. But if your bank is FDIC-insured and you have less than $250,000 in there, you have nothing to worry about.
The important thing is to make sure that your deposits are FDIC-insured. Not all banks are. You can find out which ones are by going here.
And if you have more than $250,000 at one bank? In some cases, you can divide it into different account categories to meet FDIC limits.
For more on that, check out the FDIC’s deposit insurance FAQ page.
And, finally, will your dollars be useless if the U.S. adopts a central bank digital currency (CBDC)?
This is a great question. There’s quite a bit of confusion out there about what the digital dollar will look like. So let me clarify a few key concepts here.
The digital dollar would be issued by the U.S. Federal Reserve, like all the U.S. dollar bills we use now. It would just be in a digital form.
This means that a digital dollar should be worth the same as its paper counterpart.
But there’s one issue…
It’s easier to fabricate a central bank digital currency (CBDC) out of thin air than a fiat currency. So, if the government needed to create more money, it would be even easier than it is right now. And as we know, the greater the money supply, the less valuable each unit of it becomes.
And there’s another reason to be concerned about global governments’ interest in CBDCs… As I explained previously, CBDCs would help strengthen central banks’ power over the financial system.
That’s because CBDCs will be highly centralized. And this can give the government unprecedented financial control over your life.
Unfortunately, it is becoming abundantly clear right now that the U.S. will adopt a CBDC at some point.
And it’s not just the U.S. The whole world is heading in this direction.
According to the Atlantic Council Central Bank Digital Currency Tracker, 114 countries are currently exploring a central bank digital currency. This represents 95% of global GDP.
Of these, 11 countries have fully launched a digital currency. China’s pilot digital currency, called e-CNY, reaches about 260 million people. It’s set to expand to most of the country in 2023.
So, interestingly, the U.S. is actually lagging behind.
Since the digital dollar will enable the Fed to inflate our money supply even more than it is now, consider gold again as a safe-haven asset.
When you get an unprecedented glut of freshly printed money, you’ll have investors scrambling for time-tested cash alternatives to protect their savings from inflation. This will create a bubble in gold.
Next, reader Dennis wants to know about a specific government bill. He also has a similar question to Linda regarding the safety of our money in banks, including credit unions…
I am interested in hearing your response to Executive Order 14067, and do you have any recommendations as far as protecting our monies in banks and savings accounts, including credit unions?
– Dennis M.
Hi, Dennis. Thanks for your questions and observations!
Let me start by addressing the first part of your question…
For anyone who’s not aware, on March 9 of last year, President Biden signed Executive Order 14067. It’s titled Ensuring Responsible Development of Digital Assets.
This bill was important since it marked the first time the White House formally weighed in on cryptocurrencies.
I distinctly recall rumors and fears of regulatory crackdown mounting in the days leading up to it.
And then it finally happened…
Surprisingly, the order did not announce new regulations for the industry… Nor did it lay out specific positions the administration wants agencies to adopt.
If anything, it legitimized the crypto space by acknowledging the “explosive growth” of digital assets… and affirming that the U.S. “must maintain technological leadership in this rapidly growing space.”
It also tasked the U.S. Department of the Treasury and other federal agencies with developing a regulatory plan… underscoring key areas like consumer protection, national security, and illicit finance.
In other words, it has given us hope for a regulatory framework for cryptos.
Keep in mind that, as of today, no one regulatory watchdog oversees the cryptocurrency market.
This creates a kind of regulatory uncertainty. And it makes government agencies like the SEC wary of crypto. For example, the SEC openly said that “most cryptocurrencies are securities” and “operate illegally.”
That, in turn, pushes leading crypto companies like Coinbase to explore relocation options to ensure their growth and success.
Make no mistake. Smart and responsible regulation – as opposed to a regulatory crackdown – is absolutely needed if the crypto industry is to flourish in the U.S.
So, I welcome that part of Biden’s crypto order.
But then there’s the part where it may lead to the creation of a U.S. digital currency…
You see, Biden’s executive order 14067 directs the government to assess the technological infrastructure and capacity needs for a CBDC.
As I’ve said before, a CBDC isn’t necessarily all bad.
It might come in handy if you need to receive a stimulus check… or even spark innovations in the financial sector.
That said, I don’t think that the potential benefits outweigh the potential dangers.
I find it worrisome that, with a digital dollar, the government could have complete knowledge of – and control over – every transaction you make.
Now, to address the second part of your question…
There are things you can do to protect yourself in case there’s another ticking time bomb waiting to go off in the banking sector.
And the most important precaution you can take is to make sure your deposits are FDIC-insured. I went into more detail on this in my response to Linda above… and in a recent essay.
What about credit unions?
I recently replied to a similar question in one of our mailbag issues. I encourage you to give it a read.
In short, there’s a government agency called the National Credit Union Administration (NCUA) that regulates and protects credit unions and their owners. It does so the same way the FDIC insures bank deposits.
Finally, our last question this week is from Bruce, who wants to know about a specific program of the West Australian Perth Mint…
While you were in West Australia at the Perth Mint, did you look into their “gold you can fold” program?
It allows us to buy unallocated gold, silver, and platinum by certificate at very low premiums. They store it, and we can receive our precious metals anytime we request them.
I’m told that this is the easiest way to purchase precious metals at the lowest cost, all backed by the government of West Australia.
What is your opinion of this program?
– Bruce R.
Hi Bruce, thanks so much for your great question.
The Perth Mint Certificate Program, to which you are referring, is an excellent program. That’s because it provides precious metal buyers with other purchasing options than the Perth Mint. But your purchase is as secure as if you bought it from there.
Under this program, you can buy allocated or unallocated gold, silver, or platinum through a list of third-party distributors that are approved by the Perth Mint. And you’ll receive the same certificate of authenticity from the Perth Mint as if you bought these products from the Mint directly.
This certificate is a binding legal agreement that certifies you as the owner of your precious metals. It also tells you where they are stored. Plus, it confirms that the Perth Mint holds 100% physical gold (or whatever metal you bought) in reserve to back your purchase. This is a big deal.
The program also gives you the same government guarantee that you would have if you bought precious metals directly from the Perth Mint.
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!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins