China's plan B?
If you are interested in cryptocurrencies and our financial system, you know that China is working hard towards the layout of its digital Yuan. Despite the current uncertainty regarding the coronavirus outbreak, the implications of such a Chinese Central Bank Digital Currency (CBDC) are possibly becoming a challenge for our Western monetary system and the reserve currency status of the US dollar.
Our current monetary system and its history.
- Up until 1944, the US dollar was a national currency.
Often called The New World Order, the Western monetary system was founded during the Bretton Woods Negotiations in 1944 when the USA convinced Europe, Japan, Australia, and Canada to accept the US dollar as the new reserve currency. To make the deal acceptable to its allies, the USA backed the US dollar to its huge gold reserves in a 1 Ounce of Gold to 35 USD ratio, making the US dollar as good as gold.
- From 1944 onward, the US dollar became the global reserve currency. The demand for dollars grew exponentially, and no country got them for free. They were hard-earned by labor.
Practically this meant that the allies would invest in US dollars, financing the US Empire. "To the victor go the spoils!"
Despite its earlier commitment more and more US dollars were created to finance the Vietnam War for example. No other than French President Charles de Gaulle stated: "We consider necessary that international trade is established, as it was the case, before the great misfortunes of the World, on an indisputable monetary base, and one that does not bear the mark of any particular country."
In 1971, President Richard Nixon announced that the USD would be temporarily non-convertible to gold or other reserve assets in an attempt to defend the status of the US dollar as the global reserve currency.
This happened because the USA didn't have enough gold and couldn't risk losing its gold due to the increasing demand for gold in its reserves. Countries rather wanted gold for their dollars than dollars, because they knew that the USA printed too much currency, an inflationary process that was destroying the value of the US dollar reserves the allies held in their reserves.
From 1971 onward, the USA relied upon the Petrodollar System which denominated the global oil trade in US dollars. Countries that wanted oil, needed US dollars and countries that had oil, couldn't use their own currencies but had to sell for US dollars. This system ensured a global demand for US dollars and economic growth was sufficient to support the expanding US government's budgets.
From 1971 the whole world started using fiat currency. We see on a daily basis what the effects are when governments can print money with no limitations: wealth from the middle-class and poor is transferred to the rich. This happens because when you print extra money that money will find a way into the real economy and push prices higher. The rich can afford a more expensive house, but the middle-class can no longer afford a home because their incomes don't follow the same growth path as the currency does. This process is called inflation. And it is baked in the system. In other words, they thought it through.
John Maynard Keynes: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."
For those who think it through: Your first paycheck is the best you'll ever get because, despite every future pay raise you receive, the value of your money is eroding much faster due to inflation. You get more currency, but its value goes down, continuously. It is not me saying it, it is John Maynard Keynes. This is why people often feel that they can not get ahead in life.
Unfortunately, we might have arrived at a point in this monetary system, where we start going backward instead of living the illusion of going forwards. Global central banks are all printing money and this is empovering us.
The internationalization of the Yuan.
The most anticipated digital currency of 2020 is China's digital Yuan. Given China's growing position in the world's economy, the launch of its digital Yuan could be a watershed moment that changes the global financial system, challenging the US dollar.
We already know that Chinese authorities are pioneering in many modern technologies and the adoption of the digital Yuan will be successful in China without a doubt.
We also know that China wants to bypass the US dollar in trade with its BRICS' partner countries: Brazil, Russia, India, and South Africa. Another country that wants to follow in BRICS's footsteps and adopt a digital Yuan is Iran since its economy and people have been harmed so harsh by US sanctions.
Since China produces what we consume, they can easily demand that we adopt its currency or they won't send us their products in the way we are accustomed to. This is what I call check-mate.
Why would China no longer want US dollars as a reserve currency?
First of all: China did not negotiate during Bretton Woods and wants to do its own thing.
When the Federal Reserve Bank started to do QE (printing currency with no restrictions), China understandably saw the value of its US reserves erode. And there seems no end to QE. Some economics even argue that we have recently landed in permanent QE territory.
Being the global manufacturing plant it makes sense to ask payment in your own currency. Other countries would need to have your currency first and since you don't want to give it to them for free, you create more wealth. This would mean that the West would need to work for Yuan and then use the Yuan for payments to get Chinese goods. This is the opposite of what we have today. Today China works for US dollars that the FED can create out of thin air.
China is currently subject to American tariffs in a destructive global trade started by the USA. It, therefore, has a good reason to rethink its reliance on US dollars as it no longer sees the USA as a reliable trade partner. It also wants to decide for itself whether it does trade with Iran or not.
The path to China's own monetary system.
Quite essential for having your own monetary system is a demand for your currency. And it is without a doubt that China has made significant preparations:
- The country had time to study monetary history and figured out exactly where the USA made mistakes. Therefore China can create conditions that will allow the digital Yuan to compete with the US dollar with regards to reserve status;
- China needs to back its currency and has been hoarding gold for at least a decade and some people claim it has over 20,000 metric tonnes of gold which is more than Europe and the USA have in reserve combined;
- China is well aware that Bitcoin will play a role in the new monetary system as it is best suited for the digital era: it is gold 2.0 of digital gold. Bitcoin is an algorithmic blockchain system designed to mimic gold's characteristics: it is rare and you need to mine new Bitcoins. Bitcoin mining requires electricity, in other words, money. Therefore it can replace gold in a Bitcoin Standard as it is not created 'out of thin air';
- To successfully launch their internationalized Yuan, they need to have allies and they need to create trust: I believe the BRICS countries will adopt the Yuan for those reasons. If there's any lesson that the BRICS countries learned from the Iran debacle it is that the USD can be weaponized and that they best look for alternatives. Therefore, the Swift system might get competition.
Official data shows that China's gold reserves are limited to 1843 metric tonnes of gold. This is not a realistic number! What do we know?
The USA holds 8134 metric tonnes of gold, China has been hoarding 1000 tonnes of gold annually for a decade and has a big chunk of the Bitcoin supply, the EU officially has the most gold but it is unknown to me how much Bitcoin it owns.
We know that the Chinese keep their holdings a secret, they have a lot more than the 1838 metric tonnes they claim. I am quite confident that China might have as much gold as all the EU members together, or even more, which would make China nr.1, the EU nr.2, and the USA only nr.3, at least with regards to gold reserve assets. When it comes to Bitcoin we do not have any information, although some of the big miners are Chinese.
What will happen to the price of Bitcoin and gold in the future?
Let's present two scenarios:
1. The US dollar remains the global reserve currency for another 5 decades.
The overseas demand for dollars keeps growing and this allows the United States to maintain persistent trade deficits for another 50 years without causing the value of the currency to depreciate or the flow of trade to readjust. To support the belief in the US dollar, gold remains the enemy.
The gold price will slowly go higher and soon pass the 2000 US dollar per 1 Ounce of gold level. Later it will go even higher than that, but in a controlled manner because even if the US dollar remains its status for another 5 decades, people will still want to have insurance for when this system collapses. And you should understand that all of the thousands of history's currencies eventually went to zero.
Gold and Bitcoin will both be alternative assets, outside of the banking system and will go higher, but moderate.
2. China challenges the US dollar and the Euro.
At some uncertain future period, and I believe this will be the layout of the digital Yuan in 2020, a coalition of countries led by China will precipitate a run against the U.S. dollar with serious global financial consequences. When this phase starts, the demand for US dollars will collapse and the American empire will no longer be able to afford its huge deficits. The same will be the case for Euro's but the Euro is less vulnerable because it is not the global reserve currency.
The US dollar and Chinese Yuan would both compete for the standard unit of currency in international markets for commodities such as gold and petroleum. The Euro will probably not just stand down and make its claim.
All central banks, institutions and private holdings would need to rebalance their reserves at the cost of the US dollar and Euro reserves they hold. This means they would sell them, but there would be no 'bid' and there would be a sharp sell-off of these assets.
Gold and Bitcoin will be (re)discovered as backbone assets for a new global financial system in which there is no longer any place for the inflated fiat currencies which would only lead towards more wealth inequality. The system desperately needs a new Bitcoin-Gold-Standard, which would limit the government's ability to oversupply the world with currency.
There would also be a debt jubilee to allow the reset to be successful. Global debt has now exploded and can mathematically never be paid back. Debt is a part of the current monetary system. When we want people to be able to have credit, we need debt as well. But we shouldn't pay banks 6% interest just for the privilege of using the money they print and lend into our economies.
How high can gold and Bitcoin realistically go?
Scenario 1: gold and Bitcoin co-exist as reserve assets.
Let's start with gold. The world's total above-ground gold reserves are estimated at 187.200 tonnes by the World Gold Council. Using a $1550/oz spot price, the world's gold is worth $9,33 trillion. (32,150.7 troy ounces of gold per tonnes) A $2000/oz spot price would translate into a 12,04 trillion market cap for gold.
Since Bitcoin is digital gold we will use gold's market cap to price Bitcoin. If Bitcoin reaches gold's current market cap of $9,33 trillion, 1 Bitcoin would be valued at $444,285. If Bitcoin's market cap reaches $12,04 trillion, 1 Bitcoin would be worth $573,201.
Scenario 2: gold remains a reserve asset and Bitcoin replaces the global money supply.
For gold scroll up to Scenario 1.
The total value of the world's easily accessible money is $36.8 trillion, including the world's coins, banknotes and checking deposits. If Bitcoin is to be used as money and was to replace this market cap, 1 Bitcoin could reach a value of $1,750,380.
The total value of the world's broad money is $90.4 trillion, including coins, banknotes, checking deposits as well as money market accounts, savings accounts, and time deposits. If Bitcoin is to be used as money and was to replace this market cap, 1 Bitcoin could reach a value of $4,304,761.
Why a debt jubilee?
Let's explain debt very clearly.
When a bank creates money it lends it to the governments for them to use in their economies. There is however a fee to be paid for that service. When the first 1,000,000 USD were printed, the fee was 6% or 60,000 USD. One year later, the government could only pay back 1,000,000 USD and therefore owed the bank 60,000 USD. Then another 1 million USD was printed, and the government had to pay back 1,120,000 of which it could only pay back 1 million USD. Now the owed the bank 120,000 USD. You can see how the debt is compounding and can mathematically never be repaid.
The global debt recently reached more than 215 trillion USD, including governments, corporations, and households, or more than 325% of global GDP. It can never be repaid and for example in the USA students can not join the job market because they are totally crushed by student loan debt. 33% of this debt was created during the last decade, partially because of China's credit expansion.
But it is not just people that suffer, entire countries are a victim of excessive debt and can no longer function properly as their governments are collapsing (Venezuela,...).
So whether the USA or China or Europe wants to change anything towards a monetary reset, there's this debt jubilee that needs to be addressed.
Behind the scenes.
Whether it is planned or not, it's painfully obvious to me that all central banks seem to be printing more money and are destroying their currencies in the process. At some point in the future, this will lead to a solution that is probably already in the making as I don't believe that Bitcoin was invented by accident in 2008, around the time of the Great Recession.
We went from computer to websites to smartphones and we will have e-money as well. It is for me obvious that Bitcoin will play a huge role in this new monetary system. I believe we will soon see the outlay of the new system of Central Bank Digital Currencies backed by Bitcoin.
A non-Bitcoin-backed new monetary system of CBDC's will never work, as it will be, from the start, subject to inflation and wealth erosion due to the creation of more currency at the discretion of the 'few'. A non-Bitcoin-backed monetary system would only destroy your financial freedom, as the CBDC's will not allow you to transact privately.
A non-Bitcoin-backed monetary system is exactly what we have now and it isn't working. The wealth gap is only growing and too many people have lost confidence in the system, even when they do not fully understand it.