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March
11
2021

What to expect from the coming Currency Reset
John Butler

In our present age, we see all of the traditional harbingers of a future currency reset in growing measure. Already elevated for many years prior, government debts and money supply growth have exploded during the Covid-19 pandemic. Interest rates remain near zero, or even negative across mature economies. Taxes have been increasing and broadening to capture more forms of economic activity. Regulations are becoming ever more complex and more difficult and expensive with which to comply.

The above factors have been causing visible economic damage. A clear sign that resources are being misallocated is the poor rate of productivity growth. Previously optimistic economists claiming that huge debts were not a problem, that we can grow our way out, have gone silent of late. Real wages have stagnated and inequality has risen as incomes fail to keep pace with asset prices.

Government largesse in various forms has reached levels unimaginable to prior generations. The size of the public sector in some economies exceeds 50%. Welfare states may no longer continue to grow, but their legacy debt burdens need to be serviced somehow. Even amid low interest rates on government debt, servicing costs are still high as a result of the large and growing debt piles.

Major wars may be absent, but military action on a smaller scale is commonplace across much of the Middle East, Africa and Asia. Military spending is increasing in Europe and other regions. But given that debts are already so elevated and economies so weak, a major war is not required to initiate an eventual currency reset. Indeed, in my opinion, a reset will soon be attempted, and in an entirely peaceful manner, as several major countries seek to migrate their monetary systems to some form of digital currency technology.

Currency resets and new technology

Whether the coming resets are or are not effective depends on the same factors as those we looked into yesterday. Technology enables and facilitates if used properly; or if used improperly, damages and destroys.

John Law was, by any measure, the most innovative monetary thinker of his age. Securitising the vast potential wealth of the Mississippi basin was a highly innovative idea. Using those securities as backing for paper money was also innovative. Using that paper money as a way to stimulate economic growth and the associated tax revenues, also innovative. But where Law went wrong was in thinking that he had invented a perpetual motion monetary machine that he could run ever faster if required to compensate for otherwise unsustainable economic policies.

Today’s central bankers and other economic officials appear to be suffering from the same hubris. They appear to believe that, just maybe, a new monetary technology is itself enough to reset the system and place it back on a more sustainable foundation. In any case, there are growing signs that they are going to give it a go, and soon, and digital currencies of some kind are almost certainly going to be part of the plan.

While it is impossible to know just how (or when) the coming currency reset will begin, we do have a few clues. Central banks have been studying the concept of digital currencies for years, including those potentially powered by a “blockchain” algorithm of some sort.

The technology central bankers could turn to

Blockchain is an elegant technology which solves a fundamental problem. That is, how to enable an essentially passive, decentralised network of third parties to verify the transmission of information, thereby assuring its integrity and preventing fraud.

While on the computer science drawing board in various forms for years, in 2008 the pseudonymous Satoshi Nakamoto published a paper describing a blockchain-based alternative money named bitcoin, subsequently launched to little fanfare outside a few online forums.

At first there was little interest in what amounted to an experiment in a new monetary technology. But in early 2014, following a gradual increase in activity of various kinds, bitcoin and the blockchain technology behind it landed on the front pages of several mainstream financial and even non-financial publications. The bitcoin phenomenon had begun.

Mainstream economists were sceptical of the idea that an algorithm, blockchain or otherwise powered, could possibly provide an effective alternative to the existing monetary system. Multiple Nobel laureates chimed in and were universal in dismissing the concept out of hand. Robert Shiller claimed that bitcoin didn’t even have a problem to solve, implying that the monetary system was functioning well. But was it?

The need for a solution

Ever since 2008, the monetary landscape had become increasingly bizarre. Interest rates were plummeting, to near zero in several countries. Money supply growth was rapid, and asset prices rising along with central bank purchases, but this seemed to get only little traction, if any, in the real economy. Lingering debt crises were being fought by fresh policy actions in Greece, Spain, Italy and a handful of other countries. There seemed no lack of unconventional economic policies, monetary and fiscal. And yet we were supposed to believe that the monetary system was functioning well?

In this context it was relatively easy to imagine why bitcoin was gaining a following. But there was also another reason: due to its highly decentralised nature and thus no need for a central authority of any kind to regulate it, bitcoin appealed to those such as libertarian types who tend to be sceptical of central authority generally. In blockchain technology such as bitcoin you had an example of how order could be created out of chaos without any necessary role for any government or other central authority to play at all. It was an anarchist’s dream.

Bitcoin: the monetary touchstone

That was the title of my first long-form essay on the topic of blockchain. My metaphorical reference to bitcoin as a “touchstone”­– the legendary philosopher’s stone which reveals one’s true thoughts and feelings – grew out of my view that, regardless as to whether bitcoin would ever establish itself as a functioning money, it did reveal the true monetary and by extension economic and social preferences of its commentators.

As per Shiller and the other eminent economists above, they were so isolated in their ivory towers they didn’t even understand the context. Others, in particular in the tech community, regarded blockchain technology and hence bitcoin as a natural evolution of sorts and began to imagine a world not only of cryptocurrencies but also blockchain-based “smart” contracts which would begin to disintermediate vast portions of the financial system, including credit creation and trading, and even some of the more commoditised portions of the accounting and legal professions, among others.

Thus the genie was released from the bottle, but as with the genies of legend, their promises are not always all that they seem. Bitcoin struggled then, and still does, to find non-speculative use cases outside of various illegal activities, including evading capital controls or possibly taxes. Crypto exchange frauds occurred with some regularity. Online marketplaces accepting crypto for illicit goods or services have been discovered and subsequently shut down by the authorities.

Central bank digital currencies (CBDCs)

Despite its somewhat inauspicious start, interest in blockchain technology has continued to grow. Indeed, by 2016 or so, multiple central banks were studying the topic, exploring the possibilities for monetary policy. Among other things they found attractive was that, by removing the ability to store physical cash, purely digital legal tender currencies would enable central banks to implement negative interest rates, if desired.

Going further, one could imagine digital currency algorithms that contained within them automatic withholding taxes for transactions, making it impossible to avoid or evade taxes associated with their use. Moreover, although the word “crypto” is still frequently associated with digital currencies, the two concepts are anything but the same. The fact is, a purely digital currency is infinitely more traceable than a physical one that can be withdrawn from banks, circulating independently, unverifiably and indefinitely in the black markets; in foreign jurisdictions; as a source of corruption kickbacks or payment for other nefarious or undesirable activities.

In other words, from the perspective of a central authority, there is much appeal in a purely digital currency, so long as the “crypto” part applies only to users and not the central authority itself. And if there are legal tender laws in place to enforce its use, as is the case with the national fiat currencies of today, then the appeal is all the greater.

No surprise then that, more recently, regulatory authorities have turned their attention to bitcoin and other cryptocurrencies to try and prevent their misuse, while at the same time increasingly embracing the concept of purely digital money in principle. And central banks might find it easier to migrate their national fiat currencies from paper to digital if the public has already become familiar with bitcoin or other forms of purely digital money.

Corporate backing for cryptocurrencies

Another reason why the regulatory authorities are getting involved is because more and more private sector firms, in particular financial and payments institutions, smell the opportunity for profit and want to get in on the game. As these are big firms with big profits in some cases, and also heavily regulated, it stands to reason that the regulators are trying to keep up. Bitcoin remains, as before, a monetary touchstone, if only a far more prominent one.

Among others, Mastercard, Visa, PayPal, Square and Revolut have all sought to develop bitcoin offerings as well as for the less prominent cryptocurrencies. BNY Mellon, the world’s largest securities custodian, is planning to offer digital asset custody services. JP Morgan, an ever bigger bank, is rumoured to be developing a wide-ranging cryptocurrency capability. The CME and handful of other exchanges and spread-betting platforms now have crypto contracts to trade. Multiple exchange-traded funds (ETFs) collateralised by crypto assets have been launched or soon will be.

Nor does interest in crypto stop there. US non-financial tech corporates, most prominently Tesla, have started acquiring bitcoins. One particularly aggressive strategy is being followed by MicroStrategy, Inc, which has repeatedly issued debt in order to fund bitcoin purchases and now owns more as a percentage of its market cap than any other US-listed company. The market appears pleased, driving the share price to new highs on each announcement.

Bitcoin to the moon!


Source: Yahoo Finance

Does bitcoin have an Achilles’ Heel?

There remains, however, a fly in the bitcoin ointment: a lack of end-use cases. The vast bulk of bitcoin transactions are pure speculation, that is, bitcoin passing from one investor to another. Only a tiny portion is used in actual purchases of actual good and services.

As long as the price is rising and bitcoin “miners” are compensated with new coins for processing these speculative transactions, this isn’t a problem. But as the network becomes ever larger and more expensive to maintain, and as mining seigniorage income declines, eventually to nothing, who will pay to maintain the network infrastructure? How much will they charge? Will the costs be prohibitive?

It is perhaps no surprise that the bitcoin faithful aren’t particularly keen on the topic of network costs, in particular electric power consumption. They dismiss such concerns, pointing out in a near non-sequitur that gold mining is also expensive. But there are fundamental differences here.

Gold is a thing in of itself, not a network; and the gold monetary base, as it were, already exists, is established as a store of value, is almost universally accepted for settlement and, in extremis, is still available to serve its past and possibly future monetary purposes regardless of whatever technology exists today. Indeed, it doesn’t really need any at all.

Bitcoin, or any other cryptocurrency, by contrast, is highly dependent on sophisticated modern computer networks which are self-evidently dependent on a broad range of technologies, mostly new, that have conceivable points of failure. However remote the possibility that one of these is compromised, it is not a risk that can be dismissed entirely.

But while bitcoin and other cryptocurrencies may have fundamental vulnerabilities, these do not necessarily pose any danger for the looming currency reset ahead. Indeed, it is conceivable that, as the reset approaches or is implemented, in whatever form, alternative crypto may provide a way to protect wealth during what might be a highly turbulent transition period to a new national or international monetary regime.

Or it might not. It could collapse under the weight of speculation and the considerable costs of maintaining the network. It could be crushed through heavy-handed regulation, including criminal penalties for whatever is deemed misuse. It is impossible to know.

Anatomy of the reset

The current situation is clearly unsustainable. History instructs that there is indeed a reset looming, perhaps imminently. Given the globalised, interconnected monetary and financial system, centred around the US dollar, it is likely that a number of countries may migrate more or less in concert to the new monetary regime.

Given the capabilities of digital technology for monetary policy, as discussed above, it is likely that paper, coins or other physical tokens, if they circulate at all, will do so in ever smaller amounts, essentially useless as a store of wealth. Digital currencies may also have expiry dates or have an implied negative interest rate as their value declines based on serial number.

Once the migration to a digital legal tender is complete, if it ever does happen, the authorities will have unprecedented monetary power in their hands. The question then becomes whether they will exercise it for good, or for ill. At a minimum we can assume that they will continue to finance government deficits and debt and ensure that too-big-too-fail financial institutions are supported by money injections in a crisis. Negative interest rates may be implemented. As time goes forward, the system may evolve in a variety of ways.

What money might look like

It is conceivable that the new, CBDC money will be designed and managed in a way that promotes economic stability and facilitates commerce. It would certainly be welcome to put a new technology to positive use.

But digital technology in of itself solves none of the problems associated with today’s paper-based fiat currencies. If digital money technology is used by a central authority to implement unsustainable economic policies or otherwise micromanage economic activity through manipulation or whatever might favour one group at the expense of another, rather than provide for a level playing field for all, then any such currency reset will ultimately fail and another will need to take its place.

As the socioeconomic philosopher George Gilder explains, stable, unmanipulated money provides high-quality information. That is, prices that reflect the supply and demand for goods and services in real time and space. Asset prices reflect expectations about the future, thereby allocating and reallocating savings to where it can be most efficiently invested in building and maintaining the future capital stock, the ultimate source of all economic wealth.

A stable, clear, transparent digital money could provide a solid foundation for healthy economic growth. But a digital money that is managed much as fiat currencies are today is another matter entirely.

Modern Monetary Theory

One possible aspect to the coming reset is that governments might decide, as is much discussed in policy circles today, to merge monetary and fiscal policy, as the proponents of Modern Monetary Theory propose.

Interest-bearing government debt will no longer be issued, rather currency created directly through government spending on whatever programmes. Existing debt will be either retired early in a large, one-off currency issuance or gradually, over time, as debts mature, to be replaced by digital currency. In either case, bondholders will find that their investments did not hold their value as they had hoped.

If that sounds inflationary, yes it most probably would be, perhaps highly so. Currency resets usually follow on or coincide with periods of high inflation or even hyperinflation. This time may be no different.

However, as high inflation can be socially destabilising, it is possible that policies might include a universal basic income (UBI) that, at a minimum, provides the equivalent of a “liveable wage”, however that is defined. The older middle class might see much of their wealth wiped out through high inflation, but as least they will find a safety net into which to fall along with their millennial children and grandchildren.

Households rich in real assets including property may find they fare somewhat better than those whose savings are concentrated in bonds, cash and equivalents, as real assets tend to hold their value well in an inflationary environment.

Property, infrastructure, critical industries providing food, clothing and shelter: such sectors may not be the most popular investments today alongside the craze in electric vehicles and other “green” technologies, as well as tech more generally. But in an inflationary reset, they will provide a relative safe haven from the turbulence elsewhere.

Crypto vs gold

For those optimistic that crypto will also provide a safe haven, I would recommend a look back at currency resets throughout history and point out that, while monetary technology has played a role, that role has prior, and without exception, been played to at least some extent by gold and, as frequently if not more so, by silver and precious metals generally.

Unlike emerging crypto technology, precious metals have nothing to prove. They have stood the tests of time as stores of value. War, revolution, famine, migration, boom, bust – you name it. That said, there have been instances of authorities confiscating gold and other precious metals. Charles I effectively did do by “borrowing” private holdings at the Royal Mint in order to finance his campaigns. Franklin Delano Roosevelt did so in an attempt to stop the US banking panic in 1933. There are numerous other examples.

Some claim that, unlike precious metals, crypto would not be at risk of confiscation and that encrypted bitcoin ensures complete anonymity vis-à-vis not only the parties to a transaction, but also third parties. In my opinion the opposite is true. The blockchain, if traced by sufficient forensic computing power, provides a complete record of all transactions that can then be used or abused as desired by the authorities, who most probably could also covertly confiscate bitcoins or at minimum render them effectively unusable.

However, if the authorities want to confiscate your gold, for whatever reason, they are going to have to make a rather public matter out of it. If you keep some gold in a safe at home, they are going to have to break into your house. If you have it buried in your garden, they are going to have to trespass on your property in order to dig it up.

Physical gold stored in a neutral jurisdiction, such as Singapore or Switzerland, will not be released to foreign authorities without extensive, public evidence of criminal wrongdoing. And even then, it might only be released following public trials in public courts. In this sense, gold is a sort of monetary habeas corpus: there is no easy way for authorities to confiscate physical gold short of extensive, public legal action, including a presentation of the specific charges. Bitcoins, however, can be electronically “reassigned”.

The golden constant

There is another important reason why gold and precious metals generally are likely to play an important role in wealth preservation during the coming reset, namely culture and religion. Cultures don’t change overnight, they evolve through the generations. The same could be said of major religions, each of which has a core canon of beliefs but one that, around the edges, can change over long spans of time.

The late Roy Jastram, who’s magnum opus The Golden Constant is regarded as a modern classic amongst the precious metals investment community, opined that the reason why of all substances gold came to be the pre-eminent global money went beyond any purely rational explanation as to gold’s unique physical properties. I believe that Jastram was on to something. That something is human nature. The march of technology, while impressive to be sure, so far has not fundamentally altered it. Socioeconomic structures have evolved, normally slowly, sometimes more quickly as new technologies have arrived on the scene. But human nature remains, with all its flaws.

As Lord Acton observed, power tends to corrupt; absolute power corrupts absolutely. By corollary, monetary power tends to corrupt; absolute monetary power corrupts absolutely. No technology, applied to money, can change human nature. As I write in my book, The Golden Revolution, Revisited, no form of money “can possibly replace that which transcends all government, all laws, and, indeed, all things created by man.”

John Butler
Author, The Golden Revolution

PS One of my fellow editors believes the currency reset is drawing near. Find out how he says it’ll play out, to your gain or detriment, here.


 

John Butler has 25 years experience in international finance. He has served as a Managing Director for bulge-bracket investment banks on both sides of the Atlantic in research, strategy, asset allocation and product development roles, including at Deutsche Bank and Lehman Brothers. He has advised some of the world’s largest institutional and private investors in matters ranging from wealth preservation to enhancing returns through a wide variety of innovative strategies, and he has been a #1 ranked Investment Strategist by Institutional Investor magazine. His past publications include his popular Amphora Report investment newsletter, The Golden Revolution (John Wiley and Sons, 2012) and The Golden Revolution, Revisited.

 

 

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