The big economic news last week from my perspective was largely unreported.
For several years now, I have been reporting and commenting on the gradual, yet undeniable move away from the US Dollar around the globe.
While the US Dollar still enjoys reserve status, meaning it is the most widely used currency in global trade, that reserve status is now being openly challenged.
This past week, during the Federal Reserve’s annual symposium held in Jackson Hole, Wyoming, the Governor of the Bank of England, Mark Carney, advocated that a new global monetary system be developed to replace the US Dollar as the world’s reserve currency.
I would suggest that those comments are nothing short of shocking.
This from “The New York Times” (emphasis added) (Source: https://www.nytimes.com/reuters/2019/08/23/business/23reuters-usa-fed-jacksonhole-carney.html):
Bank of England Governor Mark Carney took aim at the U.S. dollar’s “destabilizing” role in the world economy on Friday and said central banks might need to join together to create their own replacement reserve currency.
The dollar’s dominance of the global financial system increased the risks of a liquidity trap of ultra-low interest rates and weak growth, Carney told central bankers from around the world gathered in Jackson Hole, Wyoming, in the United States.
“While the world economy is being reordered, the U.S. dollar remains as important as when Bretton Woods collapsed,” Carney said, referring to the end of the dollar’s peg to gold in the early 1970s.
Emerging economies had increased their share of global activity to 60% from around 45% before the financial crisis a decade ago, Carney said.
But the dollar was still used for at least half of international trade invoices – five times more than the United States’ share of world goods imports – fueling demand for U.S. assets and exposing many countries to damaging spillovers from swings in the U.S. economy.
Carney – who was considered a candidate to be the next head of the International Monetary Fund but failed to secure backing from Europe’s governments – said the problems in the financial system were encouraging protectionist and populist policies.
Earlier on Friday, U.S. President Donald Trump said he was ordering U.S. companies to look at ways to close their operations in China, the latest escalation of mounting trade tensions between Washington and Beijing.
Carney warned that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system.
As a first step to reorder the world’s financial system, countries could triple the resources of the IMF to $3 trillion as a better alternative to countries protecting themselves by racking up enormous piles of dollar-denominated debt.
“While such concerted efforts can improve the functioning of the current system, ultimately a multi-polar global economy requires a new IMFS (international monetary and financial system) to realize its full potential,” Carney said.
China’s yuan represented the most likely candidate to become a reserve currency to match the dollar, but it still had a long way to go before it was ready.
The best solution would be a diversified multi-polar financial system, something that could be provided by technology, Carney said.
Facebook’s Libra was the most high-profile proposed digital currency to date but it faced a host of fundamental issues that it had yet to address.
“As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” Carney said.
Such a system could dampen the “domineering influence” of the U.S. dollar on global trade.
“Even a passing acquaintance with monetary history suggests that this center won’t hold,” Carney said. “We need to recognize the short, medium and long-term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.”
That last quote (emphasized) from Mr. Carney mirrors what has been my approach to providing clients advice since I began my work. It’s also the premise of my best-selling “New Retirement Rules” book.
That premise is simply: history repeats itself.
And, history teaches us that fiat currencies have a 100% failure rate. Given current world economic circumstances, there is no reason to think that perfect track record of failure will change now.
Carney made another comment at which we should look more closely. He said, “it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies.”
Synthetic Hegemonic Currency; let me break that down by pulling out the dictionary.
The definition of the word “synthetic” according to Webster (that’s Noah if you’re under 35) is “a substance that imitates a natural product”.
Hegemonic is defined as “ruling or dominant in a political context”.
The definition of currency is a “system of money”.
Putting those definitions together, we get a dominant system of money that imitates a natural one.
Dare I say it?
Fake money. Or should I say more fake money?
Here is the reality of today’s money.
Today’s money is not wealth.
Today’s money is a claim on wealth.
Money is a vehicle in which one can store economic energy until ready to deploy it. If you go to work and expend economic energy, you are awarded money which can be used to claim real wealth. That real wealth is typically physical assets; food, automobiles, real estate, etc.
When you get the money, you can spend it or deploy its economic energy immediately or save the money and deploy the reserved economic energy later.
Countries store economic energy just like people do. The economic energy stored by countries is used in trade with other countries.
For most of history, money was not a claim on wealth, money was wealth with assets like gold and silver serving as money.
After World War II, through 1971, the US Dollar was wealth. It had a direct link to gold. US Dollars could be redeemed for gold at the rate of $35 per ounce. At that point in time, the US Dollar was transformed from real money and real wealth to a claim on wealth. That’s when President Nixon eliminated the direct link between the US Dollar and gold.
Since that time, as Mr. Carney indicated in his remarks delivered at Jackson Hole, much of the rest of the world still stores its economic energy in US Dollars, although there is an ever-growing, intensifying movement away from the US Dollar.
And, in Mr. Carney’s view, it’s time to think about accelerating that move. He floated the idea of central bank controlled digital currency; a Bitcoin-like currency that is controlled by the central bankers.
While a Synthetic Hegemonic Currency (SHC) will likely be developed and implemented, it is my view that such a system will not survive long term unless there is a direct link from the SHC to real wealth like gold or silver.
And, there is talk of such a gold-backed cryptocurrency being developed.
In May of this year, Elvira Nabiullina, governor of the Bank of Russia said that she and her colleagues were reviewing a proposal to develop a cryptocurrency.
Nabiullina said this in a speech at Russia’s lower house or Duma:
“As for mutual settlements, we will consider, of course, the proposal on a gold-backed cryptocurrency. But, in my opinion it is more important to develop settlements in national currencies.”
History teaches us that currencies evolve over time. The “New Retirement Rules” book describes what we call the Currency-Money Cycle. In essence, that cycle has money moving from real wealth to a claim on wealth back to real wealth again.
Presently, it is my belief that we are nearing the next transition.
Money will be moving back to real wealth again at some future point. That change is perhaps not imminent, but it is, in my view, inevitable.
It’s time to take the appropriate steps to put yourself in a position to profit from the transition.