Governments are moving towards digital currencies, do they have gold?

The debate over central bank digital currencies (CBDCs) has been heating up since the COVID-19 crisis began. The reference to a ‘digital dollar’ in an initial draft of US legislation for the first $ 2 trillion financial stimulus package announced in March, along with the subsequent ‘Banking For All Act’ bill introduced by Senator Sherrod Brown (D-OH), has fueled this debate.

However, before the crisis began, monetary authorities in many countries had already taken steps towards cashless societies. These steps include abolishing high-value notes, imposing caps on cash transactions, introducing declaration requirements on the transportation of cash in and out of the country, reporting requirements for cash payments that exceed a specified amount, and even taxing transactions. cash.

In fact, a 2019 study by the Bank for International Settlements (BIS) revealed that central banks representing a fifth of the world’s population have said they are likely to issue the first CBDCs in the coming years.

When a considerable part of the Indian population was following the initial enthusiasm during the crucial American presidential elections in November 2016, Indian Prime Minister Narendra Modi suddenly appeared on television screens and announced that the 500 and 1000 rupee bills would no longer be legal.

The measure at the time was said to be aimed at solving the problem of banknote counterfeiting, as the 500 and Rs 1000 banknotes represented 20% of the cash value in circulation and 80% of the cash in circulation. But this surprising move by the Prime Minister of India also set the stage for the Reserve Bank of India to finally phase out cash and launch a digital rupee, which is currently in the research stage using blockchain technology.

Earlier this year, France and South Korea launched experiments specifically to test use cases for their CBDC projects.

A few months later, in an attempt to reshape its economy by starting one of the largest real-world tests for the e-RMB, China confirmed that it had implemented a pilot of its digital currency in four of its cities. The ROC appears to be leading the race to develop the first major digital currency, but the digital yuan is not a cryptocurrency like bitcoin. Instead, it is issued and controlled by the People’s Bank of China, the country’s central bank.

Shenzhen is one of four Chinese cities that has started internal testing of the digital yuan. Recently, almost 2 million people in Shenzhen signed up for the lottery. The 500 winners can now download a digital renminbi app to receive the digital yuan and spend it at more than 3,000 merchants in a particular district of Shenzhen. The world’s second-largest economy also plans to use e-RMB at the 2022 Beijing Winter Olympics.

Although China appears to be leading the main currency race to go digital, Brazil started its own experiment with localized digital money in 2014. Maricá, near Rio de Janeiro, has been using its own digital currency, called ‘Mumbuca’, to finance a of the largest basic income programs in the world. Citizens of Maricá pay with Mumbuca through debit cards that contain a scannable barcode, while low-income families do not need to buy a smartphone.

Earlier this month, the European Central Bank (ECB) took another step towards launching a digital version of the euro currency shared by 19 countries, when it issued a comprehensive report outlining the reasons why it might need to take this step. . The ECB also said it would hold public consultations on the idea with citizens, academics and bankers.

Then earlier this week, the International Monetary Fund (IMF) held a virtual panel that discussed digital currencies and cross-border payments. About 80 percent of central banks in 66 countries, including 21 advanced nations, are exploring issuing digital currencies, while 40 percent have turned to pilot programs or experiments, including the Federal Reserve, the panel noted. IMF.

The panel was presented by the managing director of the IMF in Washington, DC, Kristalina Georgieva, and the chairman of the Federal Reserve, Jerome Powell, participated. Powell spoke about the impact of a CBDC issued in the United States and how it could affect financial stability.

“We believe it is more important to get it right than to be first and doing it right means that we not only look at the potential benefits of a CBDC, but also the potential risks,” Powell said during the panel discussion Monday. “And also recognize the important trade-offs that need to be thought through carefully.”

In the run-up to this event on October 15, Kristalina Georgieva delivered a speech strangely titled “A New Bretton Woods Moment.” Under the Bretton Woods System created in 1944, gold was the basis of the US dollar and other currencies were linked to the value of the US dollar. The Bretton Woods system came to an end in August 1971, when President Richard M. Nixon announced that the United States would no longer exchange gold for US currency.

Additionally, the speech began with a reference to John Maynard Keynes, who is the father of the current fiat monetary system which is defined as a currency established as money by government regulation. As Keynesian economists attempt to monetize the worst sovereign debt crisis in human history, gold is benefiting from Keynes’s great influence on economics and policymaking.

What the world’s central banks fail to mention in these reports, speeches, and meetings is that they fail to realize that the governments of the major economies cannot continue to borrow at these absurdly low levels of interest rates.

Central banks fear raising interest rates because they assume the economy would collapse. However, they are also looking at national debts that governments never intend to pay. If rates go up and government budgets explode, that comes back as a political disaster.

However, the biggest problem is that all past debt cannot be rolled over continuously, since in most cases there have been no buyers except the banks themselves. Since the introduction of a negative interest rate policy in January 2016, the Bank of Japan (BoJ) owns between 70% and 80% of the ETF bond market in the world’s third-largest economy.

While it has gone to negative interest rates in 2014, the ECB has also destroyed its bond market in just 20 years since the launch of the euro in 1999. These central banks cannot reduce their balance sheets because there is no market for debt. The only way out is to default on all debt, and they can do so by declaring that it is perpetual with the simultaneous launch of digital currencies to avoid bank runs.

The issuance of perpetual bonds would remain the reserve of the central banks, with no intention of making them repayable. The market will already assume the bonds are AAA because they will not default, while interest is paid on them like an annuity. This would allow central banks to escape the formal default that is inevitable.

Due to the failure of these negative interest rate policies to stimulate the European or Japanese economy, the Federal Reserve has been adamant in not attempting to implement a negative interest rate policy on the world reserve currency.

However, the Keynesian reflationary actions of both the US government and the Federal Reserve are paving the way for citizens to eventually lose faith in the monetary system. All the lines that supposedly separate these two organizations are being eliminated by the introduction of Modern Monetary Theories (MMT), while the claim that the Fed is independent of the government has been openly abandoned.

The only option for governments has been to adopt their modern monetary theory, as it has become impossible for central banks to use interest rates to stimulate the economy when governments themselves are the largest borrowers.

Central banks continue to lower interest rates in hopes of stimulating demand, while governments seek taxes and become more aggressive in applying taxes. The two sides are colliding, while central banks are now caught up in using dangerous textbook theories that are being put to use in real-world economies due to governments shutting them down.

Also, while some major issues and concerns have been raised, the biggest practical issue would be a power or communication outage. Since any discussion of digital currencies by governments suggests the replacement of cash, the system would stop operating during a hurricane.

I don’t see how the adoption of major currencies going digital will benefit the average citizen, aside from ease of use. CBDCs will simply create more government intervention and oversight, while making it easier for governments to implement taxes and transfer ever-increasing debt loads to perpetual bonds during the largest debt monetization in history.

Of course, the most important reasons for governments to go digital is to make it more difficult for people to park money away from the eyes of tax authorities, while eliminating hoarding and bank runs. In short, digital fiat would take away another freedom from citizens by giving the issuer full control over the currencies.

Although I cannot store it on a flash drive, I still prefer to keep the analog gold as a protection against continued government misconduct and irresponsibility. And apparently, so do central banks according to the World Gold Council, as they have been the biggest buyers of physical gold. If you want to receive my research, newsletter, portfolio and trading alerts, click here for instant access