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.
This week, the conversation about a digital dollar continues…
If our dollar is not worth a dollar, will our dollar value at the banks lose half the value when and if the banks go digital?
– Kay K.
Thanks for writing in, Kay. You’re not alone in wondering how a shift to digital currencies and banking will affect the value of your money.
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, technically speaking, a digital dollar should be worth the same as its paper counterpart.
That said, it’s even 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 more of something there is in supply, the less valuable each unit of it becomes.
And there’s another reason to be concerned about global governments’ interest in CBDCs: CBDCs would help strengthen central banks’ power over the financial system. That’s because CBDCs will be highly centralized.
Already, according to the Atlantic Council Central Bank Digital Currency Tracker, 130 countries are currently exploring a central bank digital currency. This represents 98% of global GDP.
Interestingly, the U.S. is lagging behind. Eleven countries have already launched their own CBDC. These include Nigeria, Jamaica, the Bahamas, and several countries in the Eastern Caribbean.
Twenty-one countries are currently trialing a CBDC. These include China, Hong Kong, Sweden, Saudi Arabia, Russia, South Africa, and Singapore.
Now, some feel that the issuance of CBDCs will erode the dollar’s global dominance and therefore value. That’s because it will make all national currencies easy to use in cross-border payments.
This won’t greatly reduce transaction costs. But the argument goes that it could dethrone the U.S. dollar as the world’s premier reserve currency over the long term. I don’t agree with this argument, but it is out there, nonetheless.
China’s yuan, in particular, is often cited as the closest contender to the U.S. dollar’s long-lasting reign as the world’s primary currency. We’ve had lots of interesting discussions on that in these pages.
But in reality, the biggest threat to the dollar is the Federal Reserve. As you can see in this chart, the Fed has been in peak money-fabrication mode in recent times…
Every time the Fed increases the money supply, the value of your dollar falls. Which brings me to this next great question from reader Kevin C…
As a means of providing some stability to the U.S. fiat, do you think that pegging the U.S. dollar to gold, at a price of $8,000 or $10,000 an ounce, is a viable alternative to implementing a CBDC?
It seems to me that the real rationale for the imposition of a CBDC is more about providing the Fed with the ability to impose negative interest rates at will.
It would be a far more honest and transparent communication strategy by the Treasury Department and the Fed if they admit that a primary reason they wish to put into place a CBDC is to monitor and control the use of individuals’ own money.
– Kevin C.
Thank you for your question and observations, Kevin!
Before we get to the Fed’s motives, let me answer your question about pegging the dollar to gold.
Gold takes power away from central banks. If you peg your currency to gold, you can’t print it on a whim.
That undermines central bankers’ power over the financial system and economy. That’s the last thing that the Federal Reserve – or any central bank – wants.
On the other hand, CBDCs help strengthen central banks’ power over the financial system. That’s because CBDCs will be highly centralized.
Yes, they will use a form of blockchain tech. This is the same as most decentralized digital assets, like Bitcoin.
But CBDCs have a different raison d’être… power and control. And that brings us to your second question.
We don’t know for sure just yet. But many speculate that, as time goes by, CBDCs’ centralized blockchains will allow central banks and other government agencies to track every transaction.
The possibilities and implications are limitless. They range from taxation to interest rates, as you pointed out. But, again, we just don’t know for sure at this stage.
What we do know, however, is this:
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98 central banks are in the process of planning the digitalization of their currency.
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More than 80% of global banks are exploring digital currency.
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And overall, 130 countries are already exploring digital currencies.
I recorded an investigative report 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. You can watch it for free right here.
I became a subscriber recently, and I can’t tell you how excited I am to devour all the material and reports you published and the future ones. Your insights and experiences are indispensable, especially in these epic times we live in.
One issue that worries me is the talk about a biometric ID and vaccination as we transition to the digital assets world… and the ability of the government to control our lives with these things…
For instance, if you’re not vaccinated and boosted, you can’t have certain financial freedoms as others who are. And what are they going to do with cash?
– Fady B.
Thanks for writing in, Fady. Appreciate your kind words, too.
As our lives become increasingly more digitized, governments, international institutions, and multinational big-tech companies are seeking to develop ways to regulate them more.
That’s a fact.
On the other hand, things you mention aren’t bad per se. But, much like the internet itself, they can be used to the detriment of society.
For instance, the digital dollar (aka the Fed coin) could give the Fed a powerful tool for economic control and unprecedented intrusion into the private financial lives of billions of people.
There’s an argument to be made that Western nations should scrap CBDC plans altogether and promote stablecoins instead. But, as last year’s TerraUSD debacle showed, those need some work, too.
Smart and responsible regulation could be the answer, but it won’t happen overnight.
At the end of the day, despite all our problems here in the U.S., we don’t live under an autocratic regime.
We can and should keep our leaders in check (while working towards more personal freedom as individuals).
That’s why I spend so much time in Washington. In fact, I’m planning a trip there next month. I’ll report back on what I find out…
In the meantime, you can learn more about the risks of the kind of control you’re concerned about – including the possibility of biometric IDs – in my investigative video report. Watch it here.
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].
Happy investing… and have a fantastic weekend!
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins