We’ve been getting a lot of questions in from readers about the banking crisis… the U.S dollar… and central bank digital currencies.
And one question from a reader of colleague Nomi Prins touches on all three of these hot topics.
So in today’s mailbag edition of The Daily Cut, we’re featuring her reponse.
If you don’t know her already, Nomi used to work on Wall Street. This included a seven-figure job at Goldman Sachs.
But 20 years ago, she quit Wall Street to help regular investors build their nest eggs using the insights she gained on Wall Street.
Since then, she’s written seven books about the undue influence central bankers have over markets. She’s given talks at the Fed about how banks can better serve the real economy. And she’s launched four investment advisories under the Legacy Research banner.
Nomi also writes a free e-letter about how to navigate the distorted markets central banks have created called Inside Wall Street With Nomi Prins. And that’s where today’s mailbag was originally published.
Here’s that multi-pronged reader question…
Reader questions: 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 purely digital dollars. Is this true? If so, will our dollars be useless?
– Linda M.
Nomi’s response: Hi, Linda. Thanks for writing in!
Let’s start with your de-dollarization question. China’s currency, the yuan, is often cited as the closest contender to the U.S. dollar for a global reserve currency.
But this misses an important point. For governments and corporations to hold a currency in reserve, they must be able to rely on it having a relatively stable value. They also must have faith in their ability to move in and out of it without restrictions.
China began taking steps to open its $20-trillion bond market to foreigners last year. But the yuan still doesn’t meet any of the other standards I mentioned.
China still has capital controls on the yuan. It forces domestic households and businesses to reinvest their money into the Chinese economy instead of foreign enterprises. That keeps the yuan in China.
The idea is to keep all domestic savings within Chinese borders. But the whole point of a reserve currency is that people in other countries hold it. So those two things are at odds.
Russia is already trading with China in yuan. This had made the yuan the de facto reserve currency in Russia. But Russia doesn’t have much choice. It’s locked out of the U.S. dollar payments system. That said, as long as the Chinese Communist Party is in power, there will always be questions of trust and transparency regarding the yuan.
That’s why just 3% of the world’s reserves are held in yuan and 58% of them are held in U.S. dollars. The yuan’s share will rise if the Chinese economy continues to grow and if it further relaxes capital controls. But those are two big ifs.
What about Saudi Arabia?
As I’ve explained before, the country played a crucial role in keeping the U.S. dollar’s world reserve currency status. That’s because it’s agreed to price oil in dollars in return for U.S. military protection.
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 oil-producing countries need to be able to invest all the foreign currency 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 yuan you earn in return for oil exports, you can’t easily invest them outside of China.
Keep in mind also that the yuan is not a free-floating currency. Its exchange rate is pegged against other currencies, including the U.S. dollar, and is fully 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. It’s why the yuan hasn’t caught on with international investors.
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.
A great place to start are bullion coins. Unlike numismatic – or collectors’ – coins, which are rare, bullion coins are valued primarily for the gold they contain. Some of the more popular ones are American Eagles and Canadian Maple Leafs.
Now, onto your other question. Is your money safe in banks?
If your bank is FDIC-insured, and you have less than $250,000 on deposit with it, you have nothing to worry about. (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 purely digital currency, aka a central bank digital currency or CBDC?
There’s quite a bit of confusion out there about what the digital-only dollar will look like. So let me clarify a few key concepts here.
A U.S. dollar CBDC will function like, as the name suggests, a digital version of the U.S. dollar. And it should have the same value as its paper counterpart. It’s not a new currency. It’s just a new form of currency.
But there’s one issue…
It’s easier to fabricate a central bank digital currency out of thin air than a fiat currency.
So, if the government needs to create more stimulus money – say, in the next big downturn – it would be even easier than it is right now. As you’ll recall, when President Trump wanted to send out stimulus, he had to send checks in the mail. With a CBDC the Fed could simply drop digital-only dollars in a digital wallet on our phones.
And that could be inflationary.
CBDCs would also help strengthen central banks’ power over the financial system. That’s because they’ll will be programmable using “smart contracts.” This makes negative interest rates possible. The Fed could deduct interest from our wallets each month.
A CBDC will also allow the IRS to directly track and tax every transaction you make. That’s why the Chinese central bank is also rolling out a CBDC. It wants to know about every single transaction made within its economy.
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 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 a laggard when it comes to CBDCs.
But it won’t be able to resist the temptation to launch a U.S. dollar CBDC for long. It offers too much power to policymakers.
Write your comments and concerns to Nomi, or any of our experts here at Legacy Research, at feedback@legacyresearch.com.
Regards,
Chris Lowe
Editor, The Daily Cut