The Sage Observer

The Sage Observer

October 27, 2021
Doubt is an uncomfortable condition, but certainty is a ridiculous one.

Is the cashless society almost here?

cashless society
A US $1 bill. (Credit: US government / public domain)

“Paper money eventually returns to its intrinsic value – zero.”

Voltaire

The heavy-handed government-imposed measures in response to the COVID-19 pandemic have laid waste to much of the American economy. Small- and medium-sized businesses all across the country have been forced to shut down, while the unemployment rate peaked at a whopping 14.7% in April 2020, with a mind-boggling 51.3 million names being added to the ranks of the unemployed from the start of the pandemic through July 16, 2020. Could the conditions brought about by this harsh economic fallout ultimately lay the groundwork for a cashless society?

BIS experimenting with digital currencies

Interestingly enough, it appears the groundwork for this was already being laid well before the onset of the pandemic, judging from a January 2019 paper published by the Bank for International Settlements (BIS)—which is ironically enough entitled “Proceeding with caution – a survey on central bank digital currency.” The BIS paper contains a survey of 63 central banks, representing nearly 80% of the world’s population and 90% of its economic output.

Bank for International Settlements in Basel, Switzerland. (Credit: BIS)

Most central banks were already researching digital currencies and experimenting with creating their own digital currency as of the time this report was released. The BIS elaborates:

“A great deal of attention has been paid to the distributed ledger technology (DLT) underlying cryptocurrencies, with almost a quarter of respondents reporting that banks or non-banks are experimenting with or issuing private digital tokens as part of their payment services (Graph G, left-hand panel).”

There are about 200 active currencies in the world. The BIS highlighted two case studies in particular: Sweden and Uruguay. Sweden’s currency is the krona—interestingly similar to the word “corona,” although I’m sure that’s just a coincidence—and Sveriges Riksbank, Sweden’s central bank, has “initiated a pilot project to develop a proposal for a technical solution for Swedish kronor in electronic form, an e-krona.” Notably, cash use in Sweden has declined for years:

“Cash use in Sweden has declined for many years (Graph A). The country’s retailers have good reason to expect that the decline will continue and the cost of accepting cash will become prohibitive, so that it will no longer be accepted in the future (Sveriges Riksbank (2018))”

70% of the survey respondents were already engaged, or planning to engage, in Central Bank Digital Currency (CBDC) work as of the publishing of the BIS survey. The BIS also reported that central banks were already collaborating with each other on such projects. Safety and efficiency were cited as key motivations for a wholesale or general purpose CBDC, among other aspects of central bank mandates. Nevertheless, the paper’s overall tone was cautious, keeping consistent with its title.

 

Swedish Krona banknotes. (Credit: The Central Bank of Sweden, Riksbanken)

The overall impression is that central banks are still in the investigative phase, and there is still a ways to go before a global digital currency—assuming you believe what the BIS is claiming. However, I suspect that the BIS and its member central banks already have a digital currency waiting in the wings, ready to roll out at the perfect moment. What could that perfect moment be? The inevitable collapse of the U.S. dollar, which has long been the world’s reserve currency. As noted by The Balance, two conditions would have to be in place before the U.S. dollar could collapse:

  • The value of the U.S. dollar must have an underlying weakness
  • A viable alternative must exist

We know a viable alternative (or several) is likely already in the works, as presented in the BIS paper. However, does the value of the U.S. dollar have any underlying weaknesses? Well, of course it does—although many would disagree, misled by its status as the world’s reserve currency. Nevertheless, the U.S. dollar is still the most traded currency on earth by far, accounting for a staggering 88.3% of global forex trades, with an average daily trading value of $2.9 trillion. This is in spite of the fact that it has lost over 96% of its value since the establishment of the Federal Reserve in 1913. This means $1 today would have been worth only 4 cents in 1913.

Regardless, the dollar is used for half of all cross-border transactions on Earth, and it accounts for a staggering 61% of central bank reserves. The second most popular currency after the dollar is the euro, but it only accounts for 21% of central bank reserves. Interestingly enough, the onset of the COVID-19 pandemic seemed to briefly “strengthen” the dollar, if going simply by the Trade Weighted U.S. Dollar Index (also known as the Broad Index). This index was created by the Fed in order to measure the value of the USD against a basket of other world currencies. This index can be used to determine the purchasing value of the U.S. dollar, and it summarizes the effects of dollar appreciation and depreciation versus foreign currencies.

The sharp increase in the Broad Index earlier this year is highlighted on the interactive graph above—courtesy of the Board of Governors of the Federal Reserve System—with the index reaching a peak value of 126.4719 on March 23, 2020, shortly after the pandemic began. It is important to note, however, that this metric—and thereby this graph—is highly misleading and doesn’t provide a truly accurate measure of the dollar’s value. It is merely a measure of the dollar relative to a selected basket of other major world currencies. This will naturally be strong due to the dollar being the world’s reserve currency. However, a more critical analysis reveals some very alarming facts about the dollar, which is actually on very shaky ground. The ShadowStats alternate chart of the financial- vs trade-weighted dollar indices below paints a more accurate picture of the dollar’s health.

Financial- vs Trade-Weighted Dollar indices.
Financial- vs. Trade-Weighted Dollar indices. (Credit: Courtesy of ShadowStats.com)

Factors that affect a currency’s value

At its most basic level, the value of a currency is affected by the principle of supply and demand. In countries with a floating exchange rate—which includes the most widely traded currencies, such as the U.S. dollar, the euro, the Indian rupee, etc.—the currency is just like any other product. If a currency is in high demand (often correlating with it being in short supply), it will be more expensive. However, there are several key factors that affect this demand and subsequently, the currency’s value:

  • Inflation
  • Interest rates
  • Money supply
  • Rate of economic growth
  • Balance of payments and debts
  • Political stability

Inflation and interest rates

One of the key indicators of a currency’s strength is the inflation rate, which is closely related to interest rates. Inflation basically describes a situation where prices are rising and the value of money is dropping; it essentially occurs when the supply of goods doesn’t keep up with demand. An inflation figure by itself doesn’t mean anything; what is more important is the change in the inflation rate, which indicates how rapidly the price of goods and services is increasing. Serious inflation is difficult to stop once it begins, due to the likelihood of an inflationary spiral.

The interest rate is the price of borrowing money. More specifically, it is the price a lender charges for the use of assets, expressed as a percentage of the total amount borrowed (principal). It doesn’t just apply to cash, however; borrowed assets could also include consumer goods or large assets such as a car or house. The interest rate is typically recorded on a yearly basis as the annual percentage rate (APR). As we can see from the chart below, interest rates for a 30-year mortgage have fallen drastically over the past four decades, from a high of 18.37% in 1981 all the way down to only 2.99% today. Due to the complex interrelationship between inflation and interest rates, central banks often (seemingly) have difficulty in balancing the two.

Higher inflation correlates with a weaker currency. The inflation rate will also have a direct effect on the currency exchange rate. Central banks closely monitor the inflation rate in order to set their monetary policy and set interest rates. If a country’s inflation rate is too high, its central bank will raise interest rates to contain the inflation. This leads to a slowdown in money creation, which subsequently drives inflation down. However, if the inflation rate is too low, i.e., close to deflation (<0% inflation rate), the central bank will stimulate the economy by reducing interest rates and making it cheaper to borrow money. If inflation is moderate, the central bank will utilize both the level of inflation and the country’s economic growth rate (GDP) to set interest rates. Of course, central banks also take into account many other factors, but this provides a simplified overview.

Per the U.S. Department of Labor, “Inflation can be defined as the overall general upward price movement of goods and services in an economy.” The Bureau of Labor Statistics (BLS) has an assortment of indexes that measure different aspects of inflation. The most popular of these is the Consumer Price Index (CPI). However, the methodology for calculating CPI has been modified over the years, resulting in CPI providing a much lower and highly misleading measure of inflation.

Consumer inflation - official vs ShadowStats alternate (1980-based). (Credit: Courtesy of ShadowStats.com)
Consumer inflation – official vs ShadowStats alternate (1980-based). (Credit: Courtesy of ShadowStats.com)

The CPI worked reasonably well for the purposes of helping “businesses, individuals and the government adjust their financial planning and considerations for the impact of inflation” up until the early 1980s. However, per Shadow Government Statistics, the CPI understates inflation by roughly 7% per year, due to methodology gimmicks introduced since 1980. The understatement in CPI also leads to a higher reported rate of GDP (inflation-adjusted).

ShadowStats indicates that the official CPI inflation in the U.S. from 1970 to date has been 561%. They provide their own alternate CPI inflation measure, corrected for the federal government’s understatement of CPI. This number comes out to a whopping 4,257% from 1970 to date. That’s over eight times higher than the official numbers. Interestingly, the U.S. dollar price of gold has also increased by roughly the same percentage over the same time period (4,314%).

US President Richard Nixon with Chinese Premier Zhou Enlai in 1972. (Credit: US government / public domain)

Why exactly has this trend been exhibited over the past 50 years? The primary catalyst was when President Richard Nixon announced a new economic plan—on August 15, 1971, to be exact—which ended the convertibility of U.S. dollars to gold, as well as implemented wage and price controls. The Fed notes:

“On the evening of August 15, 1971, Nixon addressed the nation on a new economic policy that not only was intended to correct the balance of payments but also stave off inflation and lower the unemployment rate.”

Of course, as evidenced by the explosive inflationary trend noted above, Nixon’s economic plan hasn’t exactly worked out for Americans in the ensuing decades.

Money supply

The money supply, also known as the money stock, refers to the total amount of money in circulation. This includes all the currency and other liquid instruments in a nation’s economy. Roughly speaking, the money supply includes cash and deposits that can be used almost like cash. An increase in the money supply leads to cheaper costs of borrowing, which generates more investment, stimulates spending, increases business activity and raises the demand for labor. An increase in a country’s money supply also decreases the value of its currency against foreign currencies, causing the exchange rate to dip. Since higher supply leads to lower demand, a high money supply also correlates with low interest rates.

Paper currency and coin are issued by governments via some combination of their central banks and treasuries. Various bank regulations impact the money supply available to the public, such as bank requirements on holding reserves, extensions of credit, etc. Specifically in the U.S., the Federal Reserve policy is the primary factor that affects the money supply. The Fed specifically defines the money supply as “the total amount of money—cash, coins, and balances in bank accounts—in circulation. Standard measures of the money supply include the monetary base, M1, and M2.

  • Monetary base: the total currency in general circulation among the public and in reserve balances; these are strictly highly liquid funds
  • M1: the money supply consisting of physical currency and coin, as well as transaction deposits at depository institutions
  • M2: includes all elements of M1 plus “near money,” which are time deposits, such as savings deposits, money market securities, and mutual funds

Interestingly, the Fed claims the following regarding the money supply:

“Over recent decades, however, the relationships between various measures of the money supply and variables such as GDP growth and inflation in the United States have been quite unstable. As a result, the importance of the money supply as a guide for the conduct of monetary policy in the United States has diminished over time. The Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System, still regularly reviews money supply data in conducting monetary policy, but money supply figures are just part of a wide array of financial and economic data that policymakers review.”

That’s funny. I wonder why the relationships between the money supply and other variables like GDP growth and inflation have been unstable over the past few decades. Could it have to do something with the fact that the Fed relentlessly and exorbitantly prints money whenever it deems necessary? Regardless, the instability in the relationships between these variables—not to mention the fact that the Fed itself openly admits this—does not bode well for the dollar’s future. I suppose the Fed makes this open admission without any underlying explanation simply to give themselves free rein to print money recklessly.

Annual U.S. money supply growth.
Annual U.S. money supply growth. (Credit: Courtesy of ShadowStats.com)

The chart above from ShadowStats shows the exorbitant surge in money printing taking place this year, which outpaces any year during the past 16 years—perhaps even higher than every year during the last decade combined. The Fed’s latest round of money printing, following the onset of the COVID-19 pandemic, even supersedes their money printing in the aftermath of the Great Recession, during the early years of Obama’s tenure. This is extremely ominous. Such a quick surge in money printing does not bode well for the dollar’s outlook, as the ripple effects of such an artificial injection into the country’s economy will be felt for many years—although these effects will be gradual, at first, with the Fed looking to exhaust all of its possible resources to prevent this ridiculously inflated bubble from popping.

Rate of economic growth

The rate of economic growth can be measured primarily through a nation’s gross domestic product (GDP), which is one of the key indicators of the health of an economy. Various factors, including a nation’s consumption and investment, are taken into account in the calculation of GDP. It represents the total dollar value of all the goods and services produced by a nation’s economy during a specified time period. It can also be described as the total size of a nation’s economy. Central bankers also utilize GDP (through the use of the Taylor rule) to evaluate economic health and set their target interest rates.

There are two ways to express GDP: nominal GDP and real GDP. Nominal GDP takes into account current market prices without inflation or deflation. Real GDP, on the other hand, follows the gradual increase in an economy’s value over time by factoring in the natural movement of prices. GDP allows economists to determine whether an economy is growing or undergoing a recession. Additionally, investors can make investment decisions using GDP; for example, there will be lower earnings and cheaper stock prices during a bad economy. The GDP growth rate in the U.S. took a massive hit in the wake of the COVID-19 pandemic, diving nearly 35% in the second quarter of 2020 alone.

 

Percent change in real GDP from the preceding quarter. (Credit: Bureau of Labor Statistics)

As we can see, it doesn’t look good, despite the massive third-quarter rebound. This isn’t normal at all, and there is absolutely no justification for instigating such a severe slowdown in a nation’s economy in response to a relatively mild disease such as COVID-19. This is mind-boggling, by any reasonable measure. Under normal circumstances, there is no way the U.S. government, or any country for that matter, could be so reckless to enact such a devastating blow to the economy, all across the board, without a thorough analysis of all the possible implications involved—not simply those involving COVID-19. But as you may already know, these are not normal circumstances, and it isn’t due to COVID-19.

The government’s reckless disregard for all factors not named COVID-19 clearly indicates that there is something very suspicious about this entire situation; anyone that doesn’t think this is the case, unfortunately, has some screws loose in their brain. Regardless, there are countless dangerous threats in this world, including threats that far exceed the danger posed by COVID-19; it’s remarkable that a lone virus, regardless of how lethal it is purported to be, could by itself wreak such quick and sudden havoc to America’s economic output (not to mention the entire world). This would be contingent on demonstrable proof of the lethality and extreme contagiousness of COVID-19, proof that has not been provided up until this point (of course, you are more than welcome to challenge this notion in the comments below). This isn’t the bubonic plague we’re dealing with here, and certainly not anywhere close to that. Nevertheless, this is not an organic drop by any means—this economic hit was certainly pre-planned, and most Americans seem to be completely oblivious to it. The effects of this may not be felt immediately, but the disastrous cumulative effects will be felt in the months and years to come.

GDP annual growth - official vs ShadowStats.
GDP annual growth – official vs. ShadowStats. (Credit: Courtesy of ShadowStats.com)

Looking at the longer-term trend of GDP annual growth in the above chart from ShadowStats reveals that the dip in GDP growth in 2020 alone already far exceeds that of any prior year in the past 40 years—and this is only the measurement for the first two quarters, meaning GDP will dip even further in quarters 3 and 4. Note that this year’s extreme dip in GDP growth coincides with the most egregious surge in money printing since 2012, during the midst of Obama’s tenure.

Balance of payments and debt

According to the Federal Reserve Bank of New York, a country’s balance of payments (BOP), which is also known as balance of international payments, is “an accounting of a country’s international transactions for a particular time period.” The BOP is basically the difference between the money flowing into a nation during a particular period of time (such as a quarter or year) and the money flowing out to the rest of the world. It is one of two primary measures of a country’s foreign trade (along with net capital outflow). The BOP, by necessity, equates to zero; however, it consists of two nonzero components:

  • current account
  • capital account

The current account is the value of exports and imports for both goods and services. It is named as such due to the goods and services in question being consumed during the current period. The calculation incorporates both government and private payments. A surplus in the current account means that a country’s net foreign assets grew in value over the specified time period, whereas a deficit means that the country’s net foreign assets shrank. In other words, a positive current account means the country was a net lender to the rest of the world, whereas a negative current account indicates that it was a net borrower. Hence, the current account is a key indicator of an economy’s health.

Per the World Bank, in 2019, the U.S. had the world’s largest current account deficit at $498 billion, while Germany had the largest surplus at $275 billion. Unfortunately, as we can see from the St. Louis Fed graph above, the U.S. runs a significant and chronic trade deficit, with a negative current account balance every year for the past two decades (at least). This means the U.S. regularly imports more goods and services than it exports—a pattern that doesn’t seem like it will end any time soon. Something like this will inevitably come to a head.

The capital account, sometimes called the financial account, is the balance of payments for a country. It will be equal but opposite to the current account, necessitated by the BOP equaling zero. This account tracks the net change in a country’s assets and liabilities over the course of a year, and helps inform economists on whether the country is a net exporter or net importer of capital. A country like the U.S., which has a huge current account deficit, will necessarily have a huge capital account surplus (due to the balance of all transactions contained with the BOP calculation equating to zero).

IMF current account balance, as a percent of GDP. (Credit: IMF)

Cashless society in the news

In a recent NY Times piece, Liz Alderman—the Times’ Paris-based chief European business correspondent—claims that the coronavirus pandemic “is propelling a shift toward a cashless society in ways that no other single event has.” Credit card companies and banks are predictably reaping the rewards of this new dynamic. However, Alderman notes that cash still isn’t quite close to being dead. For example, bills and coins were used for 80% of European transactions prior to the pandemic.

Nevertheless, Europe still seems to be at the forefront of the push for a cash-free society. Morten Jergensen, director of the RBR, which is “a consulting firm specializing in banking technology, cards and payments,” had this to say about a potentially cash-free future:

“We’re living through an amazing global social experiment that is forcing governments, businesses and consumers to rethink their operating models and norms for social interactions. We have a world in which there is less contact. People’s habits are changing as we speak.”

Jergensen sounds awfully optimistic about the prospects for a cash-free world. The fact that he referred to the coronavirus pandemic as an “amazing global social experiment” should certainly raise eyebrows. It reminds me of Secretary of State Mike Pompeo’s offhand “live exercise” statement from earlier this year. Peculiar remarks notwithstanding, the seemingly tempered BIS report confirms that central banks around the world have already been laying the foundations for a cash-free world. Regardless, the fact that these continuing efforts by central banks are now coinciding with a worldwide pandemic that was theoretically outlined in the Rockefeller Foundation’s infamous 2010 report Lock Step should come as no surprise to anyone.

A one-world currency would eliminate currency risk in international trade, since traders would no longer need to deal with currency fluctuations. It would also level the global playing field somewhat, since countries like China could no longer manipulate its currency in order to sell their goods cheaper on the global market. China’s currency manipulation has made the price of its exports more competitive around the world, which has been a detriment to other countries. This highlights the obvious fact that monetary policy under a one-world currency would be enacted on a worldwide level, as opposed to a country-by-country basis. Analysts have noted that encapsulating the monetary policy of all nations under one global umbrella may benefit some countries while hurting others.

Foreign Affairs magazine is published by the Council on Foreign Relations. (Credit: (Institute of Current World Affairs)

Incredibly, the idea of a one-world currency was discussed as early as 1984, in a Foreign Affairs piece by Richard N. Cooper, Professor of International Economics at Harvard University. Foreign Affairs, for those who don’t know, was established in 1922 and is published by the Council on Foreign Relations (CFR), a non-profit think tank that specializes in U.S. foreign policy and international affairs. Cooper’s article is entitled “A Monetary System for the Future” and highlights how an ailing international monetary system—in 1984, that is—was leaving many participants “uneasy and discomfited.” He goes on to speculate about the coming future:

“Are international monetary arrangements stable? Are they likely to survive over a considerable period of time, such as a couple of decades? My answer is negative. Dissatisfaction with the very short-run and year-to-year movements in real exchange rates, combined with technological developments which will lead to further integration of the world economy, will sooner or later force a change of existing arrangements. Unless that alteration is carefully managed, it will take the form of defensive, insulating measures involving restrictions on international transactions, both trade and finance. That would be politically divisive and economically costly.”

Keep in mind that the CFR has countless conflicts of interest; it is one of the key driving forces behind an eventual one-world currency since the organization also serves as a front for international bankers. Thus, the publication of this article back in 1984 indicates that the CFR has had its eye on a one-world currency for at least several decades.

A 1998 article from The Economist entitled “One world, one money” also explored the idea of a one-world currency. The article notes that a country with very high labor costs, and thus a troublesome current-account deficit, would likely see a depreciation in its currency. However, due to “a world where international flows of capital overwhelm international flows of trade,” such a country’s economy could not be neatly restored to equilibrium through the typical responsive measures of cutting real wages, increasing the price of imports, and decreasing the price of exports.

Conclusion

While the prospect of a cashless society may seem extreme and far-fetched, America’s harsh economic reality in the wake of the COVID-19 pandemic may just be the catalyst for such an outcome. Personally, I believe a viable alternative in the form of a centralized, digital currency is either already finished or in the works. There is no way to know whether the BIS report was a watered-down version of what the central banks may already have been implementing; if so, they would be much further along in this area than the BIS report admits.

Children play with stacks of hyperinflated currency in the Weimar Republic, ca. 1922. (Credit: Rare Historical Photos)

Nevertheless, the more alarming reality is that the dollar exhibits multiple weaknesses in various underlying financial indicators that have the most impact on its value, namely the inflation rate, interest rates, money supply, balance of payments and debt, and a considerable degree of political instability in the wake of the presidential election. The negative progression of these variables could eventually lead to a downward spiral for the dollar, resulting in hyperinflation not seen since the 1920s in Germany, i.e., the Weimar Republic. While that sounds eerily ominous, it is a potentially devastating outcome of current U.S. monetary policy—an outcome that you should start preparing for as soon as possible, if not already.

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Chris King

https://twitter.com/Pythago38919500/status/1364674785888718849

this makes me think of Anon Sage who has disappeared

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