The coming digital dollar … its positives (mostly for the government) and negatives (mostly for you) … where else to put your wealth
Imagine the government having complete visibility into how you spend your money.
As part of this, it has access to your bank account.
So, that $300 you won last week playing poker with your buddies?
That’s income — and gets taxed as such.
Want to gift your newlywedded child with a lump sum of starter-money?
If the amount is over the legislated limit, the government sees and your child will be paying taxes on it.
Want to buy anything that’s of a personal, sensitive nature that you’d prefer remained private?
No longer private.
The government sees all and has the ability to regulate, disincentivize, or outright block these kinds of transactions as it chooses.
Our world is taking steps closer to this Orwellian future. It won’t be here tomorrow — and to be fair, there’s still a chance it won’t completely turn out this way — but the odds of this nanny state becoming a reality are on the rise.
So, in today’s Digest, let’s take a look closer at the steps governments are taking to get there.
Let’s talk about the coming age of the digital dollar.
***If you’re newer to the idea of a digital dollar, it’s what it sounds like — legal U.S. currency, but digitized
You’d have some sort of federal, digital wallet. This wallet would have a personalized government ID, likely similar to your social security number.
From this, the Fed would have the ability to deposit funds directly into your account … remove them … apply new interest rates (possibly negative rates) … deduct taxes and add refunds … and whatever else it wanted, all in the blink of an eye.
Now, there would be positives to this.
Stimulus dollars from the Fed, or any sort of emergency funding, could be transferred immediately — no delays, no checks lost in the mail, no checks delivered to an old address.
Such payments could be sorted by income level, employment status, location, or any desired factor with laser-like precision.
The government could also use this as a tool to wield greater control over the purchase of products that require closer oversight.
For example, if you tried to purchase an assault rifle without the proper permitting, the transaction could be blocked. Same with chemicals that are associated with homemade explosive devices.
On a macroeconomic level, there’s also a theoretical argument in favor of digital dollars.
For instance, sidestepping legalities for a moment, the government could decide that the purchase of a new home exceeded a suitable loan-to-value ratio, so it could block such a purchase. The argument is that this could prevent bubbles like we saw in 2008.
Or say inflation was heating up too high up in California, though it was tame in the rest of the country. Again, theoretically, the Fed could take measures to address such localized inflation imbalances without impacting the broader nation.
You could also solve a lot of problems associated with people who never pay parking tickets … or don’t pay child support … or don’t pay income taxes …
***Of course, there’s a dark side to all this
The government could decide that the economy needs a major shot in the arm. So, it wages overt war against savers, taking interest rates into negative territory to force you to do something else with your money … or else pay for the privilege of it remaining in a “savings” account.
Then there’s a murky, social middle ground when it comes to incentivizing and punishing behaviors the government likes and doesn’t like.
For example, those sugary snacks and sodas you love? Subject to some sort of debit to disincentivize unhealthy behavior.
Leafy greens and gym memberships? Perhaps a small credit.
Want to keep driving your vintage gas guzzler in the age of electric cars and green energy? Debit.
Then, of course, there’s the privacy issues we touched on above.
Utopia or dystopia — how do you view it?
Regardless of your answer, we’re getting closer to it becoming your reality.
***A new age era of governmental control to monetary policy
On Monday, Federal Reserve Chairman, Jerome Powell, said the Fed hasn’t made a decision yet as whether to issue a digital dollar.
Speaking on a panel hosted by the International Monetary Fund, he said:
It’s more important for the United States to get it right than to be first.
We are committed to carefully and thoughtfully evaluating the potential costs and benefits of a central bank digital currency for the U.S. economy and payments system.
We have not made a decision to issue a CBDC.
Our guess is this is lip-service, and the introduction of such a dollar is just a matter of time. This is for one primary reason …
The amount of control it would give our government is simply too irresistible to let slip through its fingers.
As noted above, the degree of precision with which those in power could impact economic and monetary policy is just too enticing.
It’s for this reason that, according to Powell himself, about 80% of central banks around the world are exploring the introduction of their own digital currency.
***To clarify, a digital currency does not mean “no cash” — but “no cash” is the desired end game
The hypotheticals described above — both good and bad — share a requirement …
A digital currency must completely replace physical cash, not merely accompany it.
After all, if you can still use physical cash, then you have some degree of independence, operating in the shadows beyond the Fed’s field of vision.
For now, a complete replacement of physical dollars isn’t on the table.
Powell said any digital currency should be a complement to, and “not a replacement for cash, and current private-sector digital forms of the dollar, such as commercial bank money.”
But for how long?
From a logical perspective, why would the Fed stop at a digital dollar as a mere accompaniment?
Can’t you see some argument from the politicians about cash being outdated, and about the “benefit” of the government having greater control so that it can effectuate helpful public policy?
The argument also would likely suggest a cashless society, which will help law enforcement track criminal activity, curb money laundering, and help prevent the funding of terrorist organizations.
And all of that is likely true … it’s just that a free society pays a price for that.
In June, MarketWatch interviewed Juan Manuel Villaverde of Weiss Ratings, who is an econometrician and mathematician.
From Villaverde’s interview:
My guess is that it will be initially introduced as a counterpart to physical cash, but ultimately, the idea is to completely do away with physical money.
Why is that? The answer is simple: Digital fiat gives governments compete control over the currency.
Tax avoidance would be almost impossible under this regime.
More important, governments see it as a way of backstopping bank runs, i.e. withdrawing money from banks into physical form.
In short, digital fiat gives the issuer more control over that currency.
When asked about the potential benefits of a digital currency, Villaverde said that for the public, there would be only marginal benefits — such as faster transfers.
But in exchange for that slight speed increase, we’d pay an immense price.
Back to Villaverde:
(Central bank digital currencies) are really a way for governments to increase their financial-surveillance powers, so the move to push this new type of money has more to do with that than any material benefit to citizens …
Central bank digital currencies are just a move to increase government’s grip on money, masquerading as public benefit.
***Want to escape this authoritarian oversight? Look to gold and cryptocurrencies
The reason is obvious — you’ll get your wealth outside “the system” where the government can reach in and out whenever it wants.
For help with gold investments, we’d recommend reading our macro specialist, Eric Fry, the analyst behind Fry’s Investment Report. He’s been helping his subscribers profit from gold and silver for years.
For bitcoin and cryptocurrencies, we’d point you toward Matt McCall and Charlie Shrem, editors of Crypto Investor Network.
On that note, earlier this week, Reuters reported:
Central banks … are concerned about cryptocurrencies like bitcoin or private projects like Facebook’s Libra gaining widespread traction, restricting central bank control of flows of funds.
Bottom line, a massive monetary shift is coming.
It’s not at our doorstep quite yet, but it would be naive to believe it’s not headed our way.
We’d love to hear from our Digest readers. What are your thoughts on a cashless, digitized currency? E-mail us at Digest@investorplace.com.
Have a good evening,