We’ve been writing to you about how the nature of money is changing since Fortune & Freedom was created. Central bank digital currencies (CBDCs), cryptocurrencies like bitcoin, quantitative easing, quantitative tightening, the role of the US dollar as the global reserve currency, the fate of the euro, and plenty more.
So why write about these issues again now? Because the pace of change across the board is picking up. And it’s the rate of change that moves markets.
As financial market commentators like to say, something remarkable might happen, but if it’s what the market was expecting, then asset prices shouldn’t move much in response. We call this “priced in”.
It’s an unexpected development, or an unexpected rate of change, which actually moves asset prices.
So, if you were waiting for the run on the US dollar to play out slowly over decades, then you’ve had quite a few months. The pound was the best performing G10 currency last quarter. And it surged again recently.
If you thought bitcoin was dead, you’ve had quite a surprise and missed another rally.
If you didn’t think double-digit inflation was possible, if you believed central bankers that there wouldn’t be any significant inflation, if you believed they’d be able to slow down inflation to meet their 2% target, or you thought inflation would come back down quickly, then you’ve had a rough 18 months in the markets.
And if you thought CBDCs were a conspiracy theory, you’ve been proven flat out wrong.
What ties all this together, what we call the golden thread in newsletter writing, is that it’s all about the changing nature of money. Which is alarming in and of itself. I mean, money is supposed to be money. It’s not really supposed to change.
How can people save or borrow if the nature of money changes? How can people invest in businesses or financial markets when they don’t know what the value of money will be in a few years from now? How can big businesses sign contracts and how can governments make policies if the definition of money keeps changing?
It all becomes very difficult. And so you get less of it – less of the things that make us prosper over time. Less investment, less saving, and less freedom.
And yet, so much of the change is happening regardless of how uncomfortable it may be.
Like I mentioned, it’s the accelerating pace of change that has me unusually worried lately. Although I will also admit to a bit of Schadenfreude to see comments like these from the former head of the International Monetary Fund, former French finance minister and current head of the European Central Bank, Christine Lagarde:
Anecdotal evidence, including official statements, suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee.
We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia.
These developments do not point to any imminent loss of dominance for the US dollar or the euro. So far, the data do not show substantial changes in the use of international currencies. But they do suggest that international currency status should no longer be taken for granted.
Lagarde is worried that countries will cease to use currencies like the US dollar and euro, which operate under the control of Western governments and central banks, in international trade. Why would this matter? For two reasons.
It’s tough to sanction the likes of Russia if they can just use their own trading system and currency.
Secondly, demand for Western currencies in international trade inflates their value, as well as the value of the assets denominated in that currency. This allows issuers of international currencies to get away with printing money without having to fear devaluation to the same extent other nations need to.
For now, companies and central banks must hold US dollars if they want to participate in global trade, especially for commodities like oil. But they don’t just have US dollars sitting in accounts. They invest the money into US assets which can easily be sold for dollars – usually government bonds. This means that having the US dollar as the global trading currency creates a huge demand for US government bonds, keeping the US government financed.
No doubt the Chinese and the Russians aren’t a big fan of this arrangement. Indeed, it seems the French aren’t either. But that’s the story of this month’s issue of The Fleet Street Letter, so I can’t give too much away.
The point is that, as more and more nations turn to using something other than the US dollar in international trade, it’ll have a big impact on investment prices.
In the face of losing control over the global currency system, and having already lost control of inflation, Western governments are turning to CBDCs to regain control. Indeed, this new form of money could give governments absolute control over money itself, making it whatever they say it is. This includes being able to control transactions. And that would be the most radical change in the nature of money ever.
Until now, government control over money has been tenuous. The flourishing grey economy, tax evasion and plenty of other gaps in enforcement abound. CBDCs off the opportunity to close those gaps. Which may be needed as people lose faith in fiat money, just as foreign governments and markets are losing faith in the US dollar.
Along come cryptocurrencies – another change in the nature of money. For the first time in the decades it took to dream up and create cryptocurrencies, people have an escape hatch from fiat money which they can use in their day-to-day lives. This has changed the game back in people’s favour. But only if they use it.
If I’m right about the increasing rate of change when it comes to the US dollar’s role, inflation, CBDCs and other issues facing “old money”, then this creates the perfect environment for an accelerating rate of adoption for cryptocurrencies too.
Now, I know there are two sorts of people reading Fortune & Freedom. Those who like to hear about the threats we face and those who like to hear about the opportunities. The good news is that this trend creates both.
And when it comes to the former, CBDCs could be just that: a threat on your financial freedom – which is why we’ve prepared a report on how you can escape CBDCs right here.
Editor, Fortune & Freedom