The critical question is not whether one form of money may prevail over the others, although that is crucial to understand, but what impact any of these forms of money could have on investor portfolios if it either emerged triumphant or sank beneath the waves of electronic competition.
Investors tend to think of their portfolios as consisting of asset classes such as stocks, bonds, real estate, or commodities. They forget that those assets are valued in currencies. Extreme changes in currency valuations can have as much impact on portfolio values for better or worse as the fundamentals of the assets themselves.
We will prepare investors for developments in the future of money so they can preserve wealth and prosper, not just through asset selection, but through selection of the proper currency in which to buy and sell assets and hold cash. There’s a lot to unpack. One thing we can be sure of is that the future of money will not resemble the past.
Central bank digital currencies as a form of money
Central bank digital currencies, or CBDCs, are different to cryptocurrencies such as Bitcoin [BTC], although the differences are often overlooked. CBDCs may be issued by central banks, but they are not new currencies. They will still be dollars, euros, yen, or yuan as they are today. Only the format and payment channels will change.
CBDCs will be digital only; there won’t be any paper money or cash allowed. Balances can be held in digital wallets or digital vaults without the use of traditional banks. A blockchain is not needed; the CBDC ledger can be maintained in encrypted form by the central bank itself without the need for bank accounts or money market funds. Payments can be made with an iPhone or other device, with no need for credit cards or costly wire transfers. CBDCs are coming fast and may be the future of banking and payments.
But there’s a dark side. If there is no cash, there is no anonymity. Governments will know your whereabouts and habits at all times simply by tracking your use of funds through the CBDC payment system. This can already be done to some extent by tracking credit card transactions, but the CBDC system will make State surveillance far more pervasive.
Money without banks
A reaction to the proposed change has already begun. Major banks fear they will be completely disintermediated in the payments system. It may be the case that individuals will have their own personal accounts at the Fed from which they can pay or receive funds with the wave of an iPhone. Who needs bank accounts, cheques, account statements, deposit slips, and the other clunky features of a banking relationship when you can go completely digital with the Fed?
Mastercard and Visa are also concerned that their payment channels will be made redundant. An individual Fed account on your mobile phone could eliminate the 2.5% fees that merchant acquirers charge retailers to process your credit card transactions. Payments, in general, would be faster, cheaper, easier, and more secure than they are today.
Investors need to take these developments seriously. There’s more at stake than just customer convenience. Trillions of dollars of wealth in the form of financial institution stock prices of companies such as JPMorgan, Citi, Mastercard, and Visa could be wiped out as the new digital payment technology takes hold.
SDRs as a form of money
Most monetary observers know the Fed has a printing press and can print dollars. The European Central Bank has a printing press and can print euros. The same is true of other central banks around the world. They can each print their home currencies.
But far fewer know that the International Monetary Fund (IMF) has a printing press also. They can print a kind of ‘World Money’ called the Special Drawing Right (SDR) and hand them out to the 190 countries around the world that are IMF members.
This is rarely done. It was last done in several tranches in 2009, both in response to the 2008 global financial crisis and to compensate certain members who had missed earlier allocations. Before that, the last issuance was in 1981.
However, the IMF is now moving quickly to issue new SDRs to help reliquefy the world in the wake of the pandemic panic and recession. The IMF has recently provided the latest details on this coming issue of freshly printed SDRs.
The current consensus among the top countries in the IMF — basically the G20, which includes the G7 plus China, Brazil, India, and some other major economies — is that the new issue should be equivalent to US$500 billion. However, as much as US$650 billion could be issued without further approval from the US Congress. (The US is the largest member of the IMF and has veto power over certain major IMF actions.)
A new role for the SDR
Changes in the IMF issuance process may already be in the works. These can include special allocations to poorer countries; right now, the allocations are in proportion to your IMF capital account, which means richer countries like the US get more than poorer countries. It is also possible for the IMF to issue SDRs to non-member entities, such as the United Nations, to be used for climate change programs.
After decades of sleeping on the sidelines, it looks like the SDR is ready to wake up and assume a role as a new major reserve currency controlled not by the US, but by the IMF executive committee, which includes China as a powerful member. This process will take time, but it has now begun in ways that are different from prior SDR allocations.
At a minimum, this expanded global money supply has some inflationary potential. Beyond that, the SDR may finally be ready to emerge as a rival to the US dollar as the reserve currency of choice for China, Russia, and the developing world.
Look out for the next and final instalment of this series of articles where Jim ties up his thoughts on currency and gives his opinion on what he believes to be the ‘future of money’.
All the best,
Strategist, The Daily Reckoning Australia
PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.