From Birch Gold Group
It’s been a little while since we examined China’s aim to weaken the dollar through forming its own state-controlled digital currency (also called cryptocurrency).
But now it appears that China is moving forward with its own central bank digital currency (CBDC), per the Wall Street Journal. That move could have global implications:
A thousand years ago, when money meant coins, China invented paper currency. Now the Chinese government is minting cash digitally, in a re-imagination of money that could shake a pillar of American power.
This currency is controlled by China’s central banking system, which means the idea that an individual controls his or her own money may have just been tossed in the trash.
“If it ever becomes the only means of exchange in a country, not only will the state of that country be able to track all transactions but it also will be able to ban transactions it considers anti-society,” Robert Wenzel warns.
But banning dissidents’ ability to collect and spend money isn’t the only potential for China’s “less than ethical” use of its digital currency.
The digital yuan is a tool for domestic suppression and surveillance
Adding to the list of concerns with China’s new digital yuan, Chinese consumers understandably have privacy issues, and China isn’t doing too much to allay those worries, according to the South China Morning Post:
China’s central bank is trying to allay privacy worries associated with its digital currency by promising ‘controllable anonymity’… Mobile users fear having to share too much information and private businesses have low trust in the anonymity of payments
Immediate privacy concerns aside, China’s central bank committing to “controllable” anonymity doesn’t sound like much of a solution. In fact, China seems to want to maintain a measure of control over consumers’ data.
That isn’t surprising. The new Chinese yuan is centralized, much like the Federal Reserve, so China’s central bank can maintain control. It’s not decentralized like bitcoin. That means every transaction isn’t just recorded and reported, but recorded and reported to a single government office. If you thought China’s “social credit” system was oppressive, this is an order of magnitude worse.
Dr. Ward described the digital yuan as a tool for “domestic repression or surveillance.” It’s hard to disagree.
And that control seems to be exercised by coaxing businesses to adopt the new e-yuan. The People’s Bank of China exerts a “less than ethical” level of control on businesses:
Some business owners were reluctant to participate in latest pilot programme, but were told, ‘A merchant can decline payment in Alipay or WeChat Pay, but cannot decline payment in e-yuan’.
A shop owner who refused to join a trial program for the e-yuan was “nudged” by mall management, telling him “that the digital yuan scheme was a government project and that he had better participate.” Sounds more like a threat than it does a request. (How bad must money really be if you have to threaten people to take it?)
Those are just a few concerns at the local level, in China. And there’s bad enough. But the ripple effects of the digital yuan will spread from Beijing across the world…
China’s e-yuan aims to topple global dollar dominance
According to Dr. Jonathan Ward, at least part of the reason China is entering the digital currency space is to combat U.S. trade sanctions.
At the global scale “the move raises concerns that the yuan is now an even bigger challenger to the U.S. dollar,” according to CNBC. If the digital yuan succeeds, and weakens the dollar too much, big trouble could be looming on the horizon.
Digital currencies tend to disrupt, and the U.S. hasn’t committed to moving forward with its own version yet. So, thanks in part to the e-yuan, the dollar’s status as global reserve currency could also be at stake.
The U.S. dollar still hasn’t recovered to its 2002 peak value. For the last five years, the strength of the dollar has been flat. Still worse, the last 12 months saw an 8% decline in the dollar’s power, reflected in the Bloomberg chart below:
Chart via Bloomberg
According to Goldman Sachs, “Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge.” And that’s deeply bad news. Here’s why:
“Reserve currency” status means quite a few important things. For example, reserve currencies are used for transactions between two nations using their separate, native currencies. If, for example, a Brazilian importer wants to buy a shipment of South African wine, the transaction is usually priced (and paid for) in dollars. South African banks wouldn’t know what to do with a deposit of Brazilian reals, and the buyer doesn’t want to chase down a bunch of South African rand to pay the supplier. So both companies just use dollars. That means, effectively, nearly every global business needs dollars and uses dollars.
Similarly, most global commodities are priced in dollars. Because that’s what most businesses use to pay for them.
These rewards of reserve currency status offer yet another benefit: A very deep, very wide, highly reliable source of demand. And that demand creates stability. Stability is a highly prized resource in times of crisis. Which creates demand… (Maybe that’s why somewhere between 60 to 85% of the world’s paper dollars are outside the U.S.?)
If the dollar loses its hegemony as the global reserve currency, we’d see an all-fronts crisis. All those overseas dollars would come flooding back. Global central banks would no longer have any interest in holding U.S. Treasury bonds and bills. It’s quite likely that already rising inflation would skyrocket. Analysts say such a dollar disaster could also “push up interest rates for American consumers and businesses, making everything from buying a house to building a factory more expensive.” Imported goods and services might become astronomically expensive. International travel? Forget it.
Professor Avinash Persaud encapsulates this situation quite well:
Gaining reserve currency status is heaven as you write checks and no one cashes them. Losing reserve currency status is hell as everyone starts to cash all the checks you ever wrote back in time.
And U.S. would find itself increasingly isolated, sidelined by the rest of the world, busily printing and passing around green slips of paper that no foreigner would want for anything (other than, perhaps, a souvenir).
Optimists hope such a process would take years, but who knows? If the Chinese e-yuan takes off, the dollar could weaken much faster.
As you already saw on the chart above, one thing is certain: the process has already started.
Physical Gold and Silver Could be a Way Out of This Mess
Aside from the implications for privacy, forcing consumers to spend money, and other totalitarian ideas that arise with China’s use of the e-yuan, other countries are watching too. They may pounce as the dollar’s global reserve status wanes.
There are rather depressing historical precedents for the typical response to this situation. Professor Persaud explains that two fallen reserve currencies were, “were ultimately consumed by a cycle of inflation and debasement.”
Unlike the people of China, you still enjoy a measure of economic freedom. That means it’s a good idea for you to take this opportunity to consider how to protect your hard work, and your savings, from the geopolitical schemes of central bankers.
You could refuse to play the inflation-and-debasement game by adding hard assets to your portfolio like physical gold and silver. Precious metals have a long history of acting as a hedge against inflation, which could skyrocket if China dethrones the dollar.