Welcome to our Friday mailbag edition!
Every week, we get great questions from your fellow readers. And every Friday, I do my best to answer them.
This week, we talk about the U.S.’ massive national debt – what could happen to it as the Fed rolls out an all-digital dollar…
And a reader questions a recent mailbag where I wrote about the trade relationship between the U.S. and China. Let’s dive in…
My question is, how will CBDCs reset the system? The U.S. is about $32 trillion in debt. Just switching over to the new system, there will still be debt. Unless, at the time, the debt is inflated away at the exact switch to CBDCs so no one notices.
This couldn’t just happen at the flick of a switch, correct? All prices would have to be refactored in the entire world, since all economies basically run off the dollar system? But I can see, if the switch was flipped, how all debt could be removed while making everyone instantly poorer.
It’s hard to fathom the implementation at this point. It is just all bad on so many levels. Thanks for your work.
– Steve V.
Thanks for writing in, Steve. You’re not alone in wondering how a shift to digital currencies and banking will affect the value of our 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’s the good news.
The bad news is that it will be easier to fabricate a central bank digital currency (CBDC) than a fiat currency.
And as we’ve seen before, the more money there is floating around, the less it’s worth.
So, while your scenario of massive currency devaluation with CBDCs might be a bit extreme, I could easily see the Fed pumping out digital dollars at a faster clip.
That said, thinking that moving to CBDCs would let the government erase all of its debt through inflation is unrealistic. Even more so is the idea that this could be done “so no one notices.”
As we’ve seen throughout history, when a currency loses value and inflation kicks in, it really hurts the economy and affects how people live their everyday lives. It’s not something that can be easily hidden or go unnoticed.
That goes double for a country like the United States, which has a large portion of its debt owned by foreigners and uses a currency that’s a global reserve.
Remember, much of what gives the U.S. dollar its value is the extent to which it is used as the world’s reserve currency.
Today, central banks hold about 58% of their foreign reserves in U.S. dollars. The rest is in euros (20%), British pounds (4.9%), Japanese yen (5.5%), and Chinese yuan (2.6%).
Any move to manipulate or devalue the U.S. dollar through CBDCs would seriously backfire. It risks eroding confidence in the dollar as a global reserve currency and in U.S. sovereign debt, both of which would spell disaster for the global financial system.
Fortunately, you’re right – it’s not feasible (or sensible) for the Fed to simply flip a switch and instantly bring CBDCs into existence.
Even Fed chief Jerome Powell recently confirmed that the Fed would “need Congressional approval” for a CBDC.
Now, the Fed does have the capability to roll out a digital currency independently of Congress, but it’s wary of souring relations with lawmakers. Crossing Congress could hinder any headway they’re aiming to achieve with CBDCs.
The takeaway for us is that for any CBDC bill to become law, it will have to pass through multiple stages of approval. The U.S. House of Representatives, the U.S. Senate, and then the president all need to approve it.
That means implementing a CBDC in America won’t happen overnight, even though the financial elite are already laying the groundwork.
But this move towards CBDCs isn’t driven by a desire from the Fed, the government, or anyone else to simply “inflate away the debt.” Rather, their interest in a CBDC stems from a desire to consolidate and enhance their control over the financial system.
You see, there are many ways the Fed could benefit from the rollout of an all-digital dollar.
As a government body overseeing the monetary system, the Fed would gain enhanced control and oversight over people’s transactions. So much so that the Fed could have unprecedented financial control over your life.
And, like I already said, an all-digital dollar would also enable the Fed to fabricate even more money out of thin air. That’s because it’s easier, cheaper – and faster – to create an electronic currency than a fiat currency.
There are plenty of other reasons, too. Not all are negative, as I’ve written before, but these are the primary ones.
The good news is that every time there’s been a massive change to our money, people who saw it coming had a chance to come out ahead.
For anyone who has concerns about a CBDC, it’s essential to own the right assets for wealth protection.
I’m a big advocate of gold and Bitcoin for that purpose. Both offer a chance to become our own bankers while also holding assets that are poised to grow in value as this encroachment takes place.
Gold, in particular, serves as the ultimate form of wealth insurance. It has preserved its value through every crisis imaginable.
There are many ways to own gold. For anyone who prefers physical gold, see our April 6 essay for best practices.
Anyone more interested in convenience might consider a gold exchange-traded fund (ETF). We recommend choosing one backed by physical gold. Read more about that in our April 7 mailbag issue.
And finally, anyone who has an appetite for higher-risk, higher-reward plays should check out this free presentation I put together. In it, I give details on a gold miner with as much as 50x upside potential.
Dr. Prins, I enjoy your newsletter and commentary. I tend to believe more in the free market (than central planning) but there are exceptions like defense, environmental regulation, and nascent industries. In last week’s mailbag, you seem to say that the U.S. needs more central planning to compete with China.
Why shouldn’t we simply reform some regulations, reduce government subsidies for mature industries, and let the power of the market take over? Why does a class of unelected bureaucrats know better how to spend people’s money than the people themselves? Could you please explain further why you think that the U.S. isn’t consolidating its global trade position quickly enough?
– Joe B.
Hi, Joe. Thank you for your comments, questions, and kind words.
I agree with you regarding the free market. That is to say, I believe that private investment, initiative, and innovation are important tools for moving our domestic economy and global trade position forward.
And I believe the market should reward the most critical long-term projects with investment.
But this doesn’t always happen in practice. The market isn’t perfect at matching capital with long-term projects. It’s full of short-term speculators who can and do move their money around at the drop of a hat.
As a result, I think we do need some form of efficient central planning. That’s because we’re running a $1.7 trillion deficit, and we owe nearly $34 trillion worth of debt in the form of Treasury bonds.
We need a central plan – for prioritizing, funding, and building our country’s most pressing needs – from better roads to better ways to process, store, and move energy.
And such large-scale, long-term development and infrastructure projects do require a level of government financing that the private sector alone can’t or won’t fund. And planning to get that funding for projects.
Now, it’s true bureaucrats don’t necessarily know better or more about anything than anyone else. But I still want to hold our elected bureaucrats more accountable for how they spend our money.
And one way to do that is to up our game or consolidate our trade policy more effectively with global competitors such as China. The more China increases its global trade positions and relationships, the fewer the U.S. has. And, therefore, it has less control or influence over related prices and supply chains.
Last year, China beat Germany in auto exports. And China owns 80% of the supply chain for solar manufacturing. Their lithium battery prowess puts ours to shame.
China is also beating the U.S. in key areas of technological advancement. From 2000 to 2019, China’s share of global R&D quadrupled to 25%. Meanwhile, our share fell from 37% to 27%.
It’s still higher, but without a strategy, the direction of growth favors China. And either way, the U.S. government is the largest funder of technological research and development growth.
China’s national security, trade, and economic policy is focused on reducing its reliance on Western suppliers of critical technologies in its trade. That includes initiatives like Made in China 2025 and its 14th five-year plan. These were designed to cut China’s dependence on foreign technology.
And that type of planning can work. China’s dependence on foreign factories to manufacture goods dropped by one-third in the past decade.
On the plus side for the U.S., our factory manufacturing construction has witnessed a major boom since the Bipartisan Infrastructure Law and its companion the Inflation Reduction Act were passed.
Washington passed these acts to incentive financing and subsidies across our manufacturing space. This construction boom, which the federal government spurred, will benefit our economy and global trade competitiveness going forward.
I wrote more about that boom in the July 20 Inside Wall Street, which you can read here.
Again, we are looking at federal funding more than planning, and the private sector doing a lot of the work and augmenting that financing. But the two are a good team in this regard.
The reality is that both countries want to decrease their dependence on each other’s supply and manufacturing chains.
Yet tariffs and tit-for-tat trade wars – like the U.S. blocking companies from selling China chips… and China blocking graphite exports to the U.S… only keep inflation higher. Therefore, U.S. interest rates will remain higher, too.
This situation cuts into the ability of private business to borrow money to innovate and grow.
And to me, it reflects economic and global trade policy defense instead of offense. To me, offense means planning, funding, and actualizing more efficient and state-of-the-art supply chains, innovation, processing, manufacturing, and development.
That would lead to the U.S. competing on a more level playing field of economic growth and therefore, having more control over prices in our supply chains.
This would be better for inflation and American consumers. And it requires a central plan connected to federal funding which could be amplified by private companies and the market.
All that said, I don’t believe our government has the right to probe into every detail of our private lives or have access to a vast amount of centralized financial information.
This is one of the reasons that I am concerned about the Federal Reserve’s development of CBDCs, or programmable digital dollars. Again, you can learn more about that – and what you can do to come out on the other side of this shift potentially wealthier –here.
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].
In the meantime, happy investing… and have a fantastic Thanksgiving weekend!
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins