A Chinese Laboratory (Not What You Think)

  • The perfect laboratory for digital currency
  • Harvard economist on the abolition of physical cash
  • Surveillance state dreams up ominous new ways…
  • … to track citizens and spending
  • Greg Guenthner on the market’s “steady grind”
  • James Altucher: a “godsend” crypto-adjacent IPO
  • “Stupid” vaccine tricks… Gold tricks… And more!

More than a year after we first broached the subject, it’s clearly gone mainstream…

Digital Yuan

Bloomberg is citing the proverbial “people familiar with the matter” for a story that begins: “The Biden administration is stepping up scrutiny of China’s plans for a digital yuan, with some officials concerned the move could kick off a long-term bid to topple the dollar as the world’s dominant reserve currency.”

Supposedly the Treasury, State Department, Pentagon and National Security Council are on the case.

“The People’s Bank of China has rolled out trial issuance of a digital yuan in cities across the country,” the story continues, “putting it on track to be the first major central bank to issue a virtual currency. A broader roll-out is expected for the Winter Olympics in Beijing next February, giving the effort international exposure.”

In February of last year, we took note that China’s central bank had filed more than 80 patents in its efforts to create a “central bank digital currency,” or CBDC. We also cited a couple of experts on the topic…

“In some ways, China is an ideal laboratory for the introduction of CBDC,” wrote Gal Luft and Anne Korin in their 2019 book De-Dollarization: The Revolt Against the Dollar and the Rise of a New Financial World Order.

“First, it is already a de facto cashless society. The largest bank note in circulation is 100 yuan (about $15), making big cash transactions cumbersome. While cash is not practical, credit cards have never become mainstream in the country. This is why China has become the leading society in mobile payments.”

In other words, it’s a relatively easy leap for what’s already a creep-tastic surveillance state. (Well, more so than the collect-it-all NSA, anyway. So far.)

We haven’t devoted much digital ink to the topic since February 2020. Obviously, there’ve been more, uhhh, urgent events shaking the economy and occupying our attention. But if the mainstream is playing catch-up now, then we’ll leap forward and look even further into the future today.

First, though, it’s worth noting the Bloomberg piece isn’t the only one that’s emerged this month.

Last week, The Wall Street Journal published a long front-page article by James Areddy, who covered the rise of China from Shanghai for nearly two decades — until the government expelled him last year. (If you’re a really longtime reader, you’ll recall he was interviewed by our fearless leader Addison Wiggin for the 2008 debt documentary I.O.U.S.A.)

An engaging writer, Areddy offers up some essential background: “It might seem money is already virtual, as credit cards and payment apps such as Apple Pay in the U.S. and WeChat in China eliminate the need for bills or coins. But those are just ways to move money electronically. China is turning legal tender itself into computer code.”

Sounds like a cryptocurrency? Yes, but…

“China’s version of a digital currency is controlled by its central bank, which will issue the new electronic money. It is expected to give China’s government vast new tools to monitor both its economy and its people. By design, the digital yuan will negate one of Bitcoin’s major draws: anonymity for the user.”

We suspect Areddy was wheedling his editors to give him space on this topic for a looong time… and he’s frustrated that now the Journal is addressing it at the same time as the rest of the business-journalism herd.

Which brings us to the question: Why now?

The recent burst of mainstream interest appears to have started with the most influential economist you’ve (perhaps) never heard of — Harvard’s Kenneth Rogoff.

Rogoff is best known for the 2009 book This Time Is Different — in which he and co-author Carmen Reinhart pore over eight centuries of history to identify a precise level of government debt that chokes off any prospect of meaningful economic growth in the future. (That threshold is debt totaling 90% of GDP, which the United States crossed in 2010. Spooky, huh?)

More recently — and more ominously — he’s been one of the loudest elite voices calling for the abolition of physical cash.

On March 30, he published an article at Project Syndicate — a go-to website for the power elite featuring articles by leading academics.

Rogoff wrote that a Chinese CBDC is one of many factors fueling “changes in China’s exchange-rate regime [that] are likely to trigger a significant shift in the international monetary order.”

Our macroeconomic maven Jim Rickards keeps up with many Project Syndicate articles to suss out what’s on the minds of the elites. Last week he offered a CliffsNotes summary of the Rogoff article to his Strategic Intelligence readers: “China has made huge improvements in its payments system and is aggressively forcing its trading partners in Asia and the Middle East to transact in Chinese yuan (CNY).

“China is also creating a Chinese yuan bond market so the countries who earn trade surpluses in yuan will be able to invest in yuan-denominated government bonds instead of being forced to buy U.S. Treasuries.”

A key passage from Rogoff himself: “The People’s Bank of China is far ahead of other major central banks in developing a central-bank digital currency. Although currently purely for domestic use, the PBOC’s digital currency ultimately will facilitate the renminbi’s international use, especially in countries that gravitate toward China’s eventual currency bloc.”

Time frame, you ask? “All of these initiatives are in the early stages and it will take 10 years or longer to have a major impact,” says Jim Rickards.

“Something similar happened between 1914 and 1944 as the dollar gradually replaced pounds sterling as the leading reserve currency. That process took 30 years, with the dollar and sterling sharing the spotlight in the 1920s and 1930s before the dollar finally became top dog at Bretton Woods in 1944.

“The process may happen faster now,” says Jim — thanks to better technology, the digital yuan and falling confidence in the dollar for reasons that have nothing to do with Chinese ambitions.

“The result of reduced confidence in the dollar will be inflation. That’s not a reason to hold CNY, but is a very good reason to hold gold.”

We’ll take up the matter of inflation tomorrow….

The stock market is going nowhere fast today — which is probably a good thing.

At last check, the Dow is down slightly from Friday’s record close. The S&P 500 is up microscopically from Friday’s record close. The Nasdaq is down less than a quarter-percent.

“That’s fine by me,” says our chart hound Greg Guenthner — “a calm market in these conditions is much better than a crazy rally and a huge gap higher. I prefer a steady grind that gives us the opportunity to react to market moves without the fear of a major intraday gap fill.

“As we’ve talked about for the past couple weeks, the market feels like it’s entering a mini melt-up move here in April. So a little consolidation is nothing to worry about at the moment.”

Gold’s push past $1,750 late last week has lost its oomph. As we write, the bid is down nearly 12 bucks to $1,732. Silver’s down nearly 2%, back below $25. Crude is up 36 cents but still below $60 a barrel.

Bitcoin took another quick trip over $60,000 overnight — its third this month — but is back to $59,802.

On Wednesday, trading begins in “the largest and only pure-play way for investors to ride the upside of cryptocurrency without buying cryptocurrency itself,” says our crypto enthusiast James Altucher.

The retail crypto platform Coinbase goes public on Wednesday under the ticker COIN. “For the institutional investors (pension funds, hedge funds, insurance companies, etc.) eager to get cryptocurrency exposure, the Coinbase IPO will be a godsend.

“Better still, the largest institutions will have to publicly report their ownership in Coinbase, giving new credibility to cryptocurrency as the largest institutional investors disclose holdings in the company.”

Meanwhile, “if Coinbase’s price skyrockets as expected when it begins trading, many investors may choose to invest in Bitcoin or Ethereum, rather than buying shares in Coinbase.”

In short, a rising tide would lift all crypto boats. “For people still on the fence about crypto investments,” says James, “a small purchase before the Coinbase offering could pay off remarkably.”

“Oh my heavens, where do I begin with Mr. ‘Arguments Against Vaccine Passports Are Stupid’ in Thursday’s 5?” reads an entry in a still-stuffed mailbag.

“How do you point out to someone that they’ve literally missed the entire point?

“The point is not that ‘vaccine passports’ are stupid. The point is that to GET a ‘vaccine passport,’ you have to be vaccinated! Some of us will not be getting the ‘vaccine,’ and thus we can never obtain a ‘vaccine passport.’ Then what? Society will ban me from participating in certain activities because I haven’t taken some unapproved ‘vaccine’?

“Talk about the ultimate infringement of personal freedom. Telling me I must put some unapproved ‘vaccination’ into my body when I choose not to is beyond belief. Who is anyone to tell me what I must put into my body?

“We are not even in the same universe as an identification card with your birthdate. IDs simply state your name and age, something that has nothing to do with what you put into your body. They are a reliable way to recognize that you haven’t lived long enough to partake in some of society’s more dangerous activities (driving, drinking, smoking, voting, etc….)

“Open up the world, and put your silly vaccine passport ideas away, people.

“Still shaking my head, but luvin’ The 5!”

“Regarding Jim Rickards’ point that the physical gold price is severely disconnected from the futures price,” a reader inquires, “could you ask him why there isn’t an arbitrage trade happening where gold dealers buy futures, stand for delivery and capture the spread?”

The 5: There might well be a small amount of that going on right now.

But in an environment like the present, most people who buy physical gold aren’t looking to turn around and sell it right away. They buy it as a store of value against the ongoing and accelerating depreciation of the dollar’s purchasing power.

And if anyone tries to do what you describe in large quantities, they’ll get smacked down instantly. As we’ve said many times before — most recently during the attempted silver squeeze on Reddit — the Comex reserves the right to settle a futures contract in cash.

“The Comex has emergency powers to prevent longs from taking delivery in a way that disrupts the orderly functioning of the market,” Jim wrote in 2016. “The Comex rule book makes it clear that a futures exchange is for hedging, price discovery and legal speculation, but is not a source of supply. (Physical delivery is permitted, but only enough to keep the paper price ‘honest.’ The irony, of course, is that the paper price is anything but honest, due to manipulation.)

“Another rule allows Comex officials to change the rules as needed in emergencies (something the Hunt brothers experienced when they tried to corner the silver market in 1980). The fact that longs know they cannot take delivery in the end is a major deterrent to the attempt.”

Of course, Jim is talking about attempts to squeeze the precious metals shorts. But even if the aim is to merely capture the spread, the outcome could very well be the same if enough people try to pull it off…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. An important point about central bank digital currencies: A CBDC makes it easy-peasy for a nation-state to impose negative interest rates on its subjects.

As we’ve chronicled in the past, the experiments with negative interest rates in Europe and Japan have backfired: They don’t encourage people to go out and spend money. They in fact do the opposite because people decide that negative rates are a sign that something’s really wrong with the system. They pull cash out of the bank and stash it in home safes.

An all-digital currency eliminates this “problem.” No wonder the likes of Harvard’s Rogoff are so keen for it.

And the Chinese government has come up with an ingeniously evil variation on the theme: As James Areddy reports in his Wall Street Journal piece, “Beijing has tested expiration dates to encourage users to spend [digital yuan] quickly, for times when the economy needs a jump start.”

Digital currency with expiration dates? We imagine the Federal Reserve is looking very jealously at the Middle Kingdom right now…

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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