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Might the federal government launch a digital or cryptocurrency? Early forecasts say the “fedcoin” has bipartisan support. Jay Powell, appointed as Federal Reserve chairman by President Donald Trump, said in October that the Fed is conducting research into issuing a digital currency on its own and in partnership with other central banks and the Bank for International Settlements.
Janet Yellen, appointed as Federal Reserve Chair by President Obama, said in late February, “It makes sense for central banks to be looking at issuing sovereign digital currencies.” Neither Powell nor Yellen were the first U.S. government officials to hint at a federal digital currency.
They give different reasons. Powell is more conservative, and his focus is on addressing the competitive threat of bitcoin and digital currencies from countries such as China. However, if he wanted to make the dollar more competitive against the yuan, then he should bolster the Fed’s credit.
Yellen nods to a progressive idea, saying that a fedcoin, “could help address hurdles to financial inclusion in the U.S. among low-income households.” However, if she wanted the “un-bankables” to be able to open accounts, then she would repeal anti-money laundering and other regulations that penalize a bank for crimes committed by its clients. Accounts are rejected based on how many risk categories they have. Many poor people may fall into such categories. Regulations forcing banks to monitor client activities are expensive and effectively impose a powerful incentive on banks not to accept small clients.
Both Powell’s and Yellen’s statements are disingenuous. A fedcoin is coming because it’s necessary. Allow me to explain the two real reasons: The first is sinister and the second is pernicious.
Why fedcoin? Two real reasons
The first reason is the pathological fall of interest rates over the last four decades. Interest in the U.S. dollar has not gone negative yet, though it has in the Swiss franc, the euro, the pound, and the yen. Interest rates will continue to fall.
When interest rates go sufficiently negative, banks will not be able to hold the line on paying zero interest in deposit accounts. They will be forced to pass their pain to depositors. This will provide the first incentive to withdraw cash from the banks – thus pulling out capital – since the 1930s. The paper dollar bill has zero yield. People will prefer zero to negative yield. Free is better than paying to hold your money.
The central banks have three ways to fight this. They could impose losses on dollar bills. They could create an algorithm that deducts from the face value, based on serial number. If they roll this out to point-of-sale devices, then every merchant will know the legal tender value of your cash. That “twenty” could be worth $19.93. But this is impractical and confusing.
They can demonetize cash. People are given until a certain date to turn in their cash for a credit to their bank accounts. After that, the paper will have no legal tender value. But, as Yellen noted, many people are kept out of the banking system.
Last, they could issue a fedcoin and force everyone to trade their paper cash for it. But fedcoin would be nothing like bitcoin.
It’s not bitcoin
Fedcoin would be programmed to erode at a rate to match the Fed’s negative interest rates. Thus, it would not provide a haven to anyone seeking to hold cash to avoid the erosion of bank balances. The government will have you trapped.
This is an extension of the idea behind banning gold in 1933. People were disenfranchised, unable to opt out of the government’s debt. The most conservative saver was forced to hold government bonds, rather than gold. Indeed, after that, the definition of risk-free asset became the government bond.
Since 1975, you can hold gold. But it’s not a dollar balance. It has dollar-price volatility. Hence, it’s unsuitable for many conservative savers (and financial institutions). If you have a billion dollars of cash and a liability to pay a billion dollars in two months, you cannot take the risk on gold. As we write this, the price of gold has dropped $244 dollars since the start of 2021, or about 13% in about two months.
An individual may escape the system by buying gold (or bitcoin), but dollars are trapped in the system. The seller of the gold (or bitcoin) is the new owner of those dollars and faces the same awful choice of the tiger or the tiger.
The fedcoin will further tighten the noose. Even cash will become entirely electronic and subject to slow confiscation – not by inflation – but by negative interest rates that reduce the account balance.
Keith Weiner, Ph.D., is the CEO and founder of Monetary Metals (www.monetary-metals.com).
Read more articles by Keith Weiner, Ph.D.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
