In today’s Money Weekend…how to get away with -4% interest rates…capital ratios could determine who launches CBDC first…pick your type of surveillance: governments or companies?…and more…
[Editor’s note: Our editors are taking a very well-deserved Christmas break, so while they’re away, we’re featuring their most popular articles from the year. This one is from 30 March.]
Do you know the difference between the two types of ‘cash’?
Hint: Governments love one and hate the other.
In my book, the coronavirus has made this the most essential distinction in monetary policy today.
Just ask the director of the International Monetary Fund’s (IMF) Monetary and Capital Markets Department.
Tobias Adrian says:
‘Cash, the physical object, is now potentially contagious but cash, the financial asset, is still a safe option.’
Indeed, China started confiscating and sterilising the physical object in question.
This from CNBC on 17 February (emphasis added):
‘Banks across the country had been told to withdraw potentially infected cash from circulation and disinfect it using either ultraviolet or heat treatments, the government’s State Council told reporters. Decontaminated cash would then be stored for seven to 14 days before it could be returned to the market.
‘Money removed from high-risk sites such as hospitals and markets would be sealed and specially treated, but it would then be held by the People’s Bank of China (PBOC) instead of re-entering circulation, officials said.’
Dark omens of what may yet come to pass here in the West, to be sure.
And today I’ll run you through a scenario which I think is a very real possibility.
No joke, if it were a live punt and I could still access a TAB during this pandemic, I’d consider putting a couple of soon to be antiquated pineapples on it ($50 bills).
Even if it was a multi paying $1.10, and despite my strong aversion to gambling.
The punt would have two legs and be the following:
- The first major central bank-backed digital currency (CBDC) to launch in the next three months
- And physical cash to be phased out within five years in most major economies.
How to get away with -4% interest rates
Now I’m no soothsayer.
But last year, I wrote a piece called ‘China to Fire First Shot in War on Cash’.
In it I said the following:
‘[We are heading towards] a world where there are [only] three broad classes of currency.
‘You will have genuine, bona fide cryptocurrencies, corporate ‘cryptocurrencies’ and CBDCs — all competing and interacting in different ways.’
That was back in August.
Following the COVID-19 health crisis, every investment banker and billionaire is screaming in major mastheads that a financial crisis is at our doorstep.
They want governments and central banks to pull every lever in the room, as well as mash the big red button called Quantitative Easing.
The big wigs have certainly obliged.
Unprecedented fiscal stimulus combined with central banks going on huge asset buying sprees.
But what happens if it doesn’t work?
There may be no choice for central banks but to launch central bank-backed digital currencies (CBDCs).
How else could you get away with a negative 4% interest rate? This is something that they appear hell bent on.
And it’s just conjecture, but the idea here could be to build in a time elapse spending requirement, where you are basically forced to spend your DigitalGovDollars before the timer runs out.
Otherwise their value is nil, or they start to decay or depreciate.
Negative rates are sort of doing this anyway.
By making saving pointless and borrowing (profitable?), negative rates are a perversion of the highest order.
They force you into taking greater risks with your capital.
And China has certainly bought into a version the Western debt-funded style of capitalism.
The Institute of International Finance (IIF) found in August of last year said that if you add it up all Chinese debt was 300% of GDP.
This includes household, government and corporate debt, and constitutes 15% of global debt.
Now on a per capita basis, this is not so bad…apparently.
It does, however, underline just how fragile the Chinese financial system is.
Capital ratios could determine who launches CBDC first
It sounds really dry, but I’ve been spending a lot of time thinking about capital ratios at banks recently.
This is the ‘buffer’ between banks and insolvency.
By the way, this is what China is doing to the Reserve Requirement Ratio (RRR).
As you can see, China has cut the Reserve Requirement Ratio consistently as it ravenously seeks growth:
Compared with European banks, a RRR of 12.5% is perhaps not that bad.
You can see Barclays Plc [LON:BARC], looking perilous on the capital ratio front.
European stress test results: worst-performing banks for fully loaded CET1 capital ratios (adverse scenario) 2020
Meanwhile, Australia does reasonably well in this regard, the Big Four have around 3.3% more in capital ratios than Europe, since the GFC. Prior to the pandemic, it’s previously hovered around 8% in Europe versus 11.3% in Australia.
I suspect these capital ratios will determine the cascade of CBDC launches in the year to come…
Those with weaker banks will be more likely to launch CBDCs as a pressure release valve.
China is where I think this cascade will start.
You see, China’s financial system is notoriously opaque compared with those in the West.
Their whole society is as well.
As such, it’s hard to gauge how strong their banks really are — they could be far weaker than they let on.
I previously highlighted the trifecta of personal liberty threats on the cards in the country, which were:
- The Great Firewall
- AI-powered state surveillance
- Total control over a citizen’s wallet
Two of these are in effect.
The third is kind of already here too.
Pick your type of surveillance: Governments or companies
Take for instance the AliPay platform which now has a 55% market share in the mobile payments space.
This is run by Ant Financial which was last valued upwards of $150 billion, making it the largest fintech in the world.
For context, this makes it about three times bigger than Goldman Sachs.
And the company has just launched a built-in functionality called ‘AliPay Health Code’.
It assigns users a colour — green, yellow or red — based on their health status.
CoinDesk quotes David Birch of Consult Hyperion as saying the following about what this means for Chinese citizens AND Western citizens:
‘It’s an ingenious way to track users’ potential exposure to coronavirus… “Green” users – presumably those who have tested negative for the virus – are allowed to move about the public, and they scan QR codes to “check into” densely populated areas like subway cars as they do.
‘“If somebody in the subway car is found to have the virus, you don’t have to test everybody on the train, you only have to test people in the car,” Birch said.
‘But Alipay Health Code’s tracking and tracing may grant the Chinese government a wide-open back door: A New York Times investigation found the program forwards users’ locations and personal information to servers at every scan point. The forwarding function’s name? “ReportInfoAndLocationToPolice.”
‘Alipay Health Code amounts to a startlingly effective and strikingly pervasive surveillance apparatus hard-coded into consumers’ electronic payments portal of choice. Swap “government” for “Facebook,” though, Birch said, and the reality may feel a bit closer to home.
‘He argues that two surveillance “systems” prevail.
‘You have the Chinese system, where the government spies on you and knows everything you do, and you have the American system, where companies spy on you and know everything you do.’
Which means one thing and one thing only.
As a result of this pandemic, we may witness one of the most disturbing erosions of civil liberties, ever.
I believe it starts with financial system chaos in the coming months, followed closely by the launch of CBDCs, and ends with the phasing out of physical cash.
All based on the argument that physical cash is source of contagion — a Trojan Horse if I’ve ever seen one.
For most people physical cash is the last bastion of privacy for their transactions.
In the coming days, you will hear from our colleague Vern Gowdie.
He was the only one in our office who correctly called the 2020 market crash.
Vern has some powerful ideas to share with you, and some great advice on how to protect your cash (the financial asset) as we head towards the possible extinction of cash (the physical object).
Keep your eyes peeled.
For Money Morning
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