Digital Currency = Total Surveillance

  • Jim Rickards on central bank digital currency…
  • … and “no cash, no anonymity”
  • Unemployment claims limbo under half-mill
  • How many small businesses closed for good?
  • The rate of business recovery in 50 U.S. metro areas
  • A David-vs.-Goliath battle (in a tech proxy war)
  • Bless his heart: a “pizza art” NFT

“When money goes ID-based, one… has to consider the broader parameters of the potential data creep,” says an article at The Financial Times.

Here the salmon-colored rag takes up the issue of central bank digital currency (CBDC), and raises some rather conspicuous concerns with the scheme.

“If money is to be identity-based rather than token-based and fungible,” the FT reasons, “this introduces a whole new set of ethical dilemmas and social questions, which aren’t really being asked at the moment on a wide enough social level.”

Our own macro expert Jim Rickards addressed these “ethical dilemmas and social questions” head-on in his recent interview with The 5’s founding editor Addison Wiggin…

“Central bank digital currencies… are different from cryptocurrencies such as Bitcoin, although the differences are often overlooked by the crypto crowd,” Jim says.

“A blockchain is not needed,” he emphasizes, “the CBDC ledger can be maintained in encrypted form by the central bank itself without the need for bank accounts or money market funds.

“CBDCs may be issued by central banks, but they are not new currencies. They will still be dollars, euros, yen or yuan as they are today. Only the format and payment channels will change.

“Payments can be done with an iPhone or other device with no need for credit cards or costly wire transfers,” Jim says. “Balances can be held in digital wallets or digital vaults without the use of traditional banks.”

Then there’s this:  “CBDCs will be digital only; there won’t be any paper money or cash allowed…

“If there is no cash, there is no anonymity,” Jim notes. “Governments will know your whereabouts and habits at all times simply by tracking your use of funds through the CBDC payment system,” he says.

“This is already done to some extent by tracking credit card transactions, but the CBDC system will make state surveillance more pervasive.”

Verizon Can You Here me Now

CBDC: The better to surveil you with?

“This kind of surveillance is the real driving force [behind CBDCs],” Jim concludes. And that explains why the world’s largest autocratic superpower is so keen on the idea…

“China leads the race to produce the first major central bank digital currency,” Jim says.

“China already uses facial recognition software, mobile phone GPS tracking and the purchase of plane or train tickets to track their citizens,” he notes.

In light of which, a CBDC seems irresistible: “This [level of] surveillance can be used to detect anti-state activities and to arrest dissidents or anyone who does not strictly follow the orders of Chairman Xi.

“The Chinese CBDC is already being used in prototype form,” he says, “and may receive a global coming-out party at the 2022 Winter Olympics in Beijing.

“Recently, China revealed an even greater ambition…

“China wants to take its rules for the use of CBDCs and make them the global standard,” says Jim.

“Once China’s totalitarian surveillance software is perfected, China can make it the standard for much of the world and facilitate intrusive 24/7 surveillance for every dictator and autocratic leader in the world.”

Jim continues: “Even if the U.S. and Europe don’t agree, it’s likely that many Asian and African countries might agree in exchange for aid from China. That aid [might even] take the form of access to scarce COVID vaccines,” Jim speculates.

“So while China may be the leader in the race to build CBDCs, the Fed has not been caught napping…

“The Federal Reserve has been working with scientists at MIT to develop a CBDC dollar,” Jim says. “The rollout of this new digital dollar may still be a few years away, but the implications are enormous.

“It may be the case that individuals will have their own personal accounts at the Fed from which they can pay or receive funds with the wave of an iPhone,” he continues. “Who needs bank accounts, checks, account statements, deposit slips and the other clunky features of a banking relationship when you can go completely digital with the Fed?”

Jim says: “A reaction to the proposed change has already begun.” Aside from privacy and  surveillance issues, he notes: “Major banks fear they will be completely disintermediated in the payments system.

“Mastercard and Visa are also concerned that their payment channels will be made redundant. An individual Fed account on your mobile phone could eliminate the 2.5% fees that merchants charge retailers to process credit card transactions.

“Investors need to take these developments seriously,” Jim says. “Banks and other financial institutions dominate stock market valuations today alongside the tech sector,” he notes. “CBDCs may be coming for the banks…

“Trillions of dollars of wealth in the form of financial stocks — companies such as JPMorgan, Citi, Mastercard and Visa — could be wiped out as the new digital payment technology takes hold.

“Investors should watch developments closely and be nimble when it comes to getting out of financial stocks before the digital dollar eats their lunch.”

On a macro level, Jim concludes: “The endgame for CBDCs would closely resemble George Orwell’s dystopian Nineteen Eighty-Four.

“It would be a world of negative interest rates, forced tax collection, government confiscation, account freezes and constant surveillance,” says Jim. “And if cash is gone, there is only one way to escape digital confiscation of wealth — physical gold.”

[Ed. note: Addison’s deep-dive interviews have been available to only a select audience since we launched them at the onset of the pandemic, but soon they’ll be available to every reader of The 5… Stay tuned for details.]

To the market today… where the Big Board’s reached another record high, up 150 points to 34,375.

As for the other major indexes, the S&P 500 is up nine points to 4,175, but the tech-heavy Nasdaq is in the red: down 25 points to 13,550.

Taking a look at commodities, crude’s dropped 1% to a shade under $65 for a barrel of West Texas Intermediate. Meanwhile, the price of gold is up almost 2% to $1,816.10 per ounce. And silver? Up today almost 4% to $27.50.

Finally, flagship crypto Bitcoin is down $200 at the time of writing to $57,060.

For the first time since the pandemic started, unemployment claims have come in under 500,000…

Under Half-Million Mark

“Initial claims totaled 498,000 for the week ended May 1,” CNBC says, “against the Dow Jones estimate of 527,000.

“While forecasts put a return to pre-pandemic employment two years off,” says corporate economist Robert Frick, “job gains are cutting financial stress and poverty by leaps and bounds now, and this strong trend should continue at least through the summer.”

Two years off? Again, expect a lengthy recovery…

“According to a New York Federal Reserve Bank study, 35% of businesses that were active prior to the pandemic are still closed,” says an Economic Policy Journal article.

And New York Fed “researchers… estimate that each additional week of being closed reduces the probability that a business reopens by 2%. Moreover, an additional week of business closure lowers the share of workers that are rehired at reopening.”

Here’s a bombshell: “The bank estimates imply that only about 4% of the workers [who] are still laid off from currently closed businesses will… be rehired by these businesses.” (Emphasis ours.)

Another interesting (albeit disheartening) nugget? Businesses that closed in July 2020 are 5% more likely to reopen than businesses that closed in March last year. “One possible explanation for this finding could be that aggregate conditions hit existing firms hardest in March, making a comeback more difficult.”

And for more on the outlook for businesses post-COVID…

Visual Capitalist says: “During the pandemic, many small businesses have either swiftly pivoted to survive or struggled to stay afloat.” In line with the N.Y. Fed’s findings, “on a national scale, 34% of small businesses are closed compared to January 2020.”

Using data points from Opportunity Insights, the following map surveys the rate of small-business recovery in 50 U.S. metro areas…

Change # of Small Bz

Click to Enlarge

Visual Capitalist notes: “San Francisco is one of the most affected metro areas, with a 48% closure rate of small businesses.”

And “New York City has spiralled the most since the end of September 2020.” (Which vindicates James Altucher after he went out on a limb in August last year, claiming “NYC Is Dead Forever.” And was maligned for saying so.)

“On the flip side, Honolulu has seen the most improvement,” Visual Capitalist says. “As travel and tourism numbers into Hawaii have steadily risen with lifted nationwide restrictions, there has been a 16% increase in open businesses compared to September 2020.”

Why is the fate of small business so vital?

“While mom and pop might not always be in focus… In fact, 99.9% of all businesses in the U.S. qualify as small businesses, collectively employing almost half — 47.3% — of the nation’s private workforce.”

[So… what’s the small-business outlook in your corner of the country, reader? What are you noticing as you drive down Main Street?

Bonus points for small-business owners who’ve been kind enough to give us a “boots on the ground” perspective from time to time…]

“Opening arguments began [Monday] in a case that will determine the future of the digital economy,” says our tech observer Ray Blanco. “In one corner is titan Apple. In the other, Epic Games — creator of the popular video game Fortnite.

“Last summer, Epic Games broke Apple’s rules, and Apple swiftly removed Fortnite from its App Store as punishment,” Ray says. “But Epic Games alleges Apple’s App Store is a monopoly.

“And so began [Epic Games] nearly year-long campaign against the digital behemoth.

“The goal of the lawsuit isn’t for some big payout,” Ray notes. “Instead, Epic is looking to rewrite the rules of the digital economy that Apple has had a big part in shaping.

“If successful, Epic Games could upend the $100 billion app economy… creating a new path for creators and loosening Apple’s grip on this space.”

Ray continues: “It’s not hard to see why Apple comes under fire for its policies. Apple requires that any third-party applications must be downloaded through its App Store. [Apple] then takes a 30% cut of all purchases.”

On the other hand, “Fortnite is a notoriously ‘freemium’ application — meaning it’s free to download and makes all of its revenue from players buying various [accessories] for their characters in the game.

“So Epic Games decided to bypass Apple’s 30% commission rule and offer users a way to purchase items directly from the video game maker, sometimes even at a discount.

“This breach of contract got Fortnite kicked off Apple’s App Store, and kicked off the legal battle…

“Epic’s main argument is that Steve Jobs himself said Apple didn’t intend to make money off the App Store, but instead wanted to use the digital marketplace to add value to iPhones,” says Ray.

Now? “The App Store is a big part of Apple’s business, as it reportedly grossed $64 billion in sales in 2020.

“So while developers are adding value to iPhones with their games and applications, they become trapped in Apple’s digital ecosystem, which takes a significant chunk of their money when, as Epic says, it doesn’t really even need to.”

We’ll keep you updated on Epic Games’ legal action. In the meantime, it’s certainly worth mentioning that Microsoft publicly backs Epic’s claim.

Hmm… Has this David-and-Goliath battle become a proxy war between two of the biggest companies in the world? Stay tuned…

Since the fate of small business has monopolized much of our five minutes today, we thought we’d follow up on Barstool Sports’ NFT

Come to find out, Dave Portnoy — Mr. Barstool Sports himself, aka “El Presidente” — has a charitable side. He started the Barstool Fund to help struggling small businesses. (We don’t believe the proceeds from Portnoy’s NFT will go to the fund, however.)

At last count, the Barstool Fund has raised $39,256,433 for business owners negatively impacted by the pandemic who are encouraged to submit an application for assistance.

And one Rhode Island small-business owner — Eric Palmieri of D. Palmieri Bakery — is making his own mouthwatering contribution to the Barstool Fund…

Dave Portnoy

Photo courtesy of Eric Palmieri
The Van Gogh of Pizza…

“A work of ‘pizza art’ with Dave Portnoy’s head on it is up for auction,” says a local NBC affiliate.

In case you’re wondering about the pizza toppings, the singular pizza features shredded chicken, breaded eggplant, pepperoni, tomatoes, black olives and black pepper. What… no anchovies?

“There’s only going to be one El Presidente Pizza, so that makes it kind of special,” Palmieri says. You probably see where he’s going with this… “It’s not an edible pizza. Instead, it’s what Palmieri described as a one-of-a-kind NFT.”

Heh… FinTech meets “pizza art.” Well, his heart is in the right place…

Best regards,

Emily Clancy
The 5 Min. Forecast

Emily Clancy

Emily Clancy

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