Every day that passes we are seeing changes as far as currencies are concerned globally. Given the rest of the news and the tendency of the mainstream media to report with bias, many of these changes have gone largely unreported and consequently unnoticed.
For a long time, recognizing that the current financial system is highly stressed, and the current level of money printing and debt accumulation is unsustainable, I have been forecasting a future ‘reset’ of some kind.
In the October “You May Not Know Report” newsletter distributed to my clients, I noted that there are two ways for this reset to occur – either reactively or proactively. I offered the example of Zimbabwe as a reactive reset and the example of the Bretton Woods agreement as a proactive reset.
If you’re not a reader of the “You May Not Know Report”, I’ll briefly summarize here. In the case of Zimbabwe, due to overspending and massive money printing by Robert Mugabe, a reactive reset took place. Once the citizens of Zimbabwe woke up to the fact that holding currency versus tangible assets didn’t make sense, the rush to own tangible assets created massive price inflation. In this reset, the government simply opted to allow the citizens to use stronger currencies like the US Dollar.
The Bretton Woods agreement created a new monetary system in the 1940’s. This system was anchored by the US Dollar which was redeemable for gold at a rate of $35 per ounce. This was a proactive reset of the monetary system. This system remained in place until 1971 when the link between the US Dollar and gold was broken.
Shortly after the link between the US Dollar and gold was eliminated, a deal was struck with Saudi Arabia to sell oil only in US Dollars and the Petro-Dollar was born. Now, due to profligate spending and reckless money printing by the Fed, the writing is on the wall. This trend will have to end.
You don’t need to be an economist to recognize this. More than $3 trillion was created out of thin air this year alone. This week’s RLA radio guest, Rob Kirby contends that there is more money being created than is admitted by the Fed. He provides compelling evidence to back up his claim.
During the interview, Rob borrows an analogy he borrows from past RLA Radio guest, Chris Martenson. The analogy: imagine that you begin by putting one drop of water in Yankee Stadium and then every minute you double it. One minute after placing the one drop of water in the stadium, you place two drops. After another minute passes, you place four drops. And so on.
At the end of 45 minutes, the water level in the stadium is just covering the bases, but after 50 minutes, the stadium is completely full of water. The point is simply that all the action happens in the last five minutes.
Past RLA Radio guest, Alasdair Macleod, made this point as well. Mr. Macleod has suggested that hyperinflations occur quickly, over a period of months rather than years.
So, the bottom line is that money creation is occurring at a level that is not sustainable, and the trillion-dollar question is what will the reset look like? Will it be reactive, or will it be proactive and how will you be affected?
There is growing evidence that there is activity occurring presently that may lead to a proactive reset although, at the present time, there is nothing concrete. Trying to figure out what this reset might look like based on the information that is available is a lot like putting a puzzle together.
As I have reported previously, the idea of a “Digital Dollar” has been floated twice already this year. Although the idea is still an idea at this point in the United States, other countries around the world are testing digital currencies. The Bahamas, Ukraine, Uruguay, and parts of China are testing digital currencies presently.
At the end of September, the European Central Bank applied to trademark the term “Digital Euro” which can be abbreviated to DE. Perhaps a move to get the Germans more comfortable with the idea?
Now, just about 2 weeks after the European Central Bank applied for the “Digital Euro” trademark, the Bank of Japan is getting in on the act. This from Zero Hedge (Source: https://www.zerohedge.com/markets/circle-complete-boj-joins-fed-and-ecb-preparing-rollout-digital-currency) (emphasis added)(official excerpt from the BOJ’s statement in larger font):
On Friday, the Bank of Japan joined the Fed and ECB when it said it would begin experimenting on how to operate its own digital currency, rather than confining itself to conceptual research as it has to date.
Digitalization has advanced in various areas at home and abroad on the back of rapid development of information communication technology. There is a possibility of a surge in public demand for central bank digital currency (CBDC) going forward, considering the rapid development of technological innovation. While the Bank of Japan currently has no plan to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, the Bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.
The bank explained that it might provide general-purpose CBDC if cash in circulation drops “significantly” and private digital money is not sufficient to substitute the functions of cash while promising to supply physical cash as long as there is public demand for it.
Interesting that the Bank of Japan states, “while the Bank of Japan currently has no plan to issue CBDC”. From my experience, whenever a politician or a central banker floats an idea with such a disclaimer, that is exactly what they are planning.
“Reuters” also reported on the development (Source: https://www.reuters.com/article/japan-economy-boj-digital/boj-to-start-central-bank-digital-currency-tests-next-fiscal-year-idUSKBN26U0RA) (emphasis added):
The Bank of Japan said on Friday it would begin experimenting next year on how to operate its own digital currency, joining efforts by other central banks to catch up to rapid private-sector innovation.
The move came in tandem with an announcement by a group of seven major central banks, including the BOJ, on what they see as core features of a central bank digital currency (CBDC) such as resilience and a clear legal framework.
When digital dollars were proposed previously, it was suggested that the Federal Reserve would maintain a digital wallet for each American. The reason given for the development of a digital dollar wallet was that it would be easier and more efficient for citizens to receive their stimulus payments, a.k.a. “helicopter money”.
And, while the Bank of Japan stated there would be physical cash available if there was public demand for it, my cynical side questions this statement.
While physical cash would likely be available for a period, one can’t help but wonder for how long. Once a population gets comfortable with digital currency and largely quits using cash, it’s easy for a central bank to justify pulling the cash and using only the digital currency.
Once the cash get pulled, it then becomes far easier to impose negative interest rates across the board.
I remain hopeful that we will ultimately see a proactive reset with a digital currency that is linked to gold or silver. History suggests that when fiat currencies fail, the population typically demands a return to some form of gold or silver-based currency.
No matter when or how a reset might occur, holding gold and silver in a portfolio makes sense for many investors.
Many traditional money managers are now jumping on the gold and silver bandwagon. While this doesn’t guarantee anything as far as the price of gold and silver are concerned, it’s interesting at the very least.
Kelvin Tay of UBS Global Wealth Management had this to say, “We like gold because we think that gold is likely to actually hit about $2,000 per ounce by the end of the year. In the event of uncertainty over the US election and the COVID-19 pandemic, gold is a very, very good hedge.”
Wells Fargo’s head of real asset strategy John LaForge had this to say about gold, “The fundamental backdrop looks good. Interest rates remain low, money supplies excessive and we are doubtful that the US Dollar’s September rally has long legs. We view gold at these prices as a good buying opportunity and, as evidenced by our 2021 year-end targets, expect higher gold prices.
I will revisit this topic as information warrants.