BIS Working Paper on Central Bank Digital Currencies

The Bank for International Settlements has published this new work paper on central bank digital currencies. Below is an excerpt from the Conclusion section of the paper and then a few added comments. I added underlines for additional emphasis.

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"This paper has examined the rise of central bank digital currencies, a new payment technology that may soon be available in a number of countries around the world. We have presented a novel CBDC project index (CBDCPI). We have shown that this index is higher in jurisdictions with higher mobile phone usage and higher innovation capacity. Especially retail CBDCs are more likely where there is a larger informal economy, and wholesale CBDCs are more advanced in economies that have higher financial development. We have also noted that CBDC projects differ starkly across countries, both in their motivations and their economic and technical design. Many central banks are pursuing models where a CBDC is a direct claim on the central bank, but with private intermediaries. To better understand these differences, we have zoomed in on three advanced cases, namely those of the People’s Bank of China, Sweden’s Riksbank and the Bank of Canada."

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My added comments: Readers will note that this new paper appears to imply that we may be closer to seeing a central bank or banks try to implement some version of a central bank digital currency than has been the case up to now. They specifically mention three "advanced cases" in China, Sweden, and Canada. We do continue to note however, that we still do not see any indication that there is any widespread plan for implementation of some kind of central bank currency very quickly. We see this in the final paragraph of the conclusion section:

"Going forward, events such as the Covid-19 pandemic highlight the value of access to diverse means of payments, and the need for any payment method to be both inclusive and resilient against a broad range of threats, just as cash is (see Auer et al (2020)). While it is difficult to anticipate the range of challenges ahead, central banks will continue to take a long-term view and carefully consider the role of CBDCs in a range of potential future scenarios."

Another point to note in this paper (which we see over and over again in similar papers on this topic) is the statement that none of these central bank digital currencies are intended to replace cash. Here is that statement from the conclusion:

"Yet our overview has also shown some key common features. In particular, none of the designs we survey is intended to replace cash; all are intended to complement it."

There is no doubt that many are suspicious that central banks do want to create a "cashless society" and it is true that a cashless society would make it easier for central banks and governments to track financial  transactions and would be a potential threat to financial privacy for the individual. However, no study I have seen on this topic has ever included a stated goal of the elimination of the use of cash and many studies done by central banks specifically state the it is not possible to eliminate cash nor desirable for a variety of reasons. Most studies talk about a central bank digital currency as a complement to cash just as this paper does.

Overall, we still do not see any indications that there is a broad movement underway by central banks to quickly implement central bank digital currencies. A few may be closer to trying something. The Federal Reserve in the US has announced plans to enter in a multi year study on central bank digital currencies with no decision made yet on how it might be implemented or even if it would be implemented. Central banks consistently mention a number of significant potential problems and obstacles to implementation including the impact on commercial banks, the impact on personal financial privacy, and various potential cyber security issues. In addition, problems trying to use blockchain in any system that needs to process millions of transactions quickly is also a problem. 

In summary, there is nothing in this new BIS work paper that would suggest anything is different than we just reported in this recent article on this topic. If and when any major western central bank actually moves to implement some kind of central bank digital currency, it does not appear they will making any kind of major change to the existing monetary system. These currencies would just be another version of their existing national currencies which are mostly "digital" now anyway rather than actual physical notes. 

It would be a significant change in our view here if central banks allowed individual citizens to hold bank accounts directly with the central bank to hold their national currency in whatever form it might take (CBDC or otherwise). We will watch for any change like that over time. 

Central Bank Digital Currencies (CBDC's) - Pro and Con

This is a topic we have covered here for several years. First we had a variety of private sector forays into the world of creating cryptocurrencies with most of the early attention focused on Bitcoin and the related blockchain technology that came along with it. Over time all kinds of new currencies arose and the private sector dived head first into tying to figure out ways to utilize blockchain technology. This whole process has been going on now for some time and thus far we have not seen any of this lead to something that leads to broad public adoption of an alternative cryptocurrency to seriously challenge the existing national fiat currencies. Even a huge private sector initiative from Facebook (Libra) discovered that there are many regulatory challenges involved with trying to do something that the central banks prefer left in their domain.

It would not be accurate however to say that central banks have ignored all this furor. All around the world central banks started up studies and test pilot programs to see if they should look into both issuing their own version of a "digital currency" and also blockchain technology as well. This process has been very slow to unfold and at this time there are still no major western central banks expected to issue a central bank digital currency (CBDC) in the near future; although China may be closer than some others to giving it a try. We have covered all this here and have informed readers not to expect this kind of change to show up any time soon in any of the major western central banks. 

There are many reasons why this is the case. Some are technological, others are political, and still others are just the tendency towards stasis that exists in our present monetary system. The public at large has not demanded this kind of major change and a large segment of the public likely would distrust it for one reason or another. So there is still no reason to think we will see this kind of change coming soon, especially at the Federal Reserve in the US. 

In this article, we will feature two articles that look at this whole topic from a "pro and con" perspective. Central banks do have interest in exploring this further and do list some "pros" they can see for either "wholesale CBDC's" (bank to bank) or "retail CBDC's" (includes the general public having accounts at the central bank). But even the central banks continue to bring up some "cons" they say would have to be overcome. Of course central bank critics see lots of "cons" and not that many "pros". Here we will provide links to two articles so that readers can explore this topic in depth if they want to.

First, we have this new Digital Monetary Institute journal from the OMFIF that talks about the status of China's efforts to test the use of a new digital form of their currency and also how Asia in general has a number of projects underway. The OMFIF is generally pro central bank in its outlook. Here is an excerpt from the Introduction section (I added underline):

"Central bank digital currency activity is accelerating in Asia, where a range of digital payments and financial infrastructure projects is moving from desktop study to beta test implementation. This edition of the DMI Journal takes the region as its inspiration with accounts of digital projects from both private and public sectors, stretching from China to Manila via Bangkok and Singapore. We also highlight a pair of projects from Europe.

Much attention is fixed on the People’s Bank of China’s test in four cities of its retail CBDC, a digital fiat currency distributed on the mobile phone platforms of two leading social messaging services. This adds much greater functionality to both private sector offerings, as well as potentially displacing cash for the majority of retail transactions. The PBoC is at pains to stress that its Digital Currency Electronic Payment is not designed as a substitute for cash. The digital cash circulating is fully collateralised, and the authorities have partial view over users and transactions. While the precise features of this model may not be attractive to other central banks, the experiment will be studied with great interest worldwide. Katie-Ann Wilson’s article explores these and other issues in greater detail."

Next we have this recent in depth article by Alasdair Macleod appearing on the Goldmoney web site. In this article the author looks at this topic from the perspective of a central bank critic. He first lists a number of reasons why central bank digital currencies might appeal to various central banks. He lists some of the same "pros" that the central banks themselves mention in their studies. Then he offers a review of this list of potential advantages from the point of view that they will not end up working out to be in the public interest if implemented. Finally, he concludes with this comment:

"The further benefit for central banks is it will increase their power as an organ of the state at the expense of commercial banks, potentially becoming more important than the state itself. However, the current economic situation is deteriorating more quickly than a working CBDC can be introduced, so the whole exercise is likely to be too late to have any relevance to monetary policy in the foreseeable future."

The very last sentence (I underlined above) is an interesting observation and does fit in with what we have observed here as well. We have documented how slow this process is moving and also explained the various roadblocks and challenges central banks would have to overcome to try and implement this in the real world. Central banks prefer to reduce risk as much as possible and a change like this can carry a number of risks that most central banks may prefer not to take. For one thing, there is no major detectable demand from most of the public for this kind of change right now. Commercial banks may not like it either. Also, everyone from Bitcoin to Facebook is attempting to offer the public alternatives to central bank managed currencies, but none of these have gained widespread public adoption thus far.

Meanwhile, all over the planet, governments and central banks are flooding the world with more money in an effort to stave off a deep recession and/or depression. The COVID-19 pandemic has encouraged (forced?) central banks to ramp up these efforts. However, many observers point out that problems were already present in the current system before the pandemic. The unusual ongoing activity in the repo market by the US Fed started long before the pandemic arrived (we reported it here last fall). Some would argue the pandemic is just speeding up a process already in progress that threatens the stability of our present monetary system. Some cynics feel that that whichever side wins the upcoming US election will only impact the speed at which the present system becomes unsustainable. In this recent video discussion we featured here on the blog, even former Fed Chairwoman Janet Yellen stated that at some point the US debt to GDP ratio will become unsustainable. Interestingly, neither political party in the US is talking about this issue at all.

Are the central banks in a race against time to make any changes like this before the whole question becomes a moot point because major currencies have been too debased? Above we have provided links to a lot of in depth material in these two articles. Readers can review them and come to their own conclusions. Here, we will continue to monitor events and report what actually happens, which is what matters most.
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Added notes: One reader I view as well versed in monetary issues sent me this comment after reading a preview of the article above:

"In the end, notes, bills, currencies, credit of all kinds - of whatever denomination - have to prove a store of value to serve as money, and thus in their issuance, related to some measure in the real economy for people to trust it, have confidence in it."

Also, here is an example of an earlier article we did here on this topic featuring some comments from an expert (Robert Bell of KlickEx) who has helped us out here over the years on this topic. Robert is recognized around the world as an expert on payments systems technology as used by central banks. He told me years ago that central banks are very slow to make significant technology changes and also explained the specific challenges associated with trying to use blockchain. In fact, here is what he told me in the article linked just above in October 2019:

"As far as real systemic change... There's nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. The central banks will implement real time slowly, and banks will reduce cross border prices slowly. 

Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that's all. Open Banking, is speeding things up a bit, but not much."  - Robert Bell

Monthly BIS Update

Below is the monthly update from the Bank for International Settlements. We featured the video discussion on the policy response to the COVID-19 pandemic in an earlier article.

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August 2020

Cross-border bank lending jumps Global cross-border bank claims surged by $2.6 trillion in the first quarter of 2020, with a particularly strong rise in lending to borrowers in advanced economies.

Improving cross-border payments The Committee on Payments and Market Infrastructures sets out building blocks towards a roadmap to improving cross-border payments. Credit risk framework The Basel Committee has published a new credit valuation adjustment risk framework for derivatives and securities financing transactions.

The economic policy response to Covid-19 Agustín Carstens joins Ben Bernanke, Tharman Shanmugaratnam and Janet Yellen to discuss the economic policy response to Covid-19 at a virtual seminar organised by the Yale Program on Financial Stability.

Swap lines and dollar funding  Swap lines have met the short-term dollar funding needs of non-US banks, but corporate dollar funding needs loom large.

More BIS publications  FSI Occasional Paper: Managing bank failures The European framework for bank failure management requires amendment to adequately deal with mid-sized banks. Irving Fisher Committee Publication: Enhancing fintech statistics The Irving Fisher Committee sets out a map to enhance the statistical measurement of fintech. BIS Bulletin: Covid-19 drives inflation risks Inflation risks – downside, upside, or both – have increased almost everywhere as a result of the pandemic.

Former Fed Chiefs Discuss the Policy Response to the COVID Pandemic

Recently, the Yale University Program on Financial Stability hosted a panel discussion that included former Federal Reserve Chiefs Ben Bernanke and Janet Yellen along with Agustin Carstens (current head of the Bank for International Settlements) and Tharman Shanmugaratnam.(Senior Minister of Singapore). The panel was asked to talk about the overall policy response around the world (and especially at the Federal Reserve) to the economic disruption created by the  COVID-19 pandemic.

These are worthwhile discussions to listen to because you have both current officials and former officials talking openly about the problems and issues they face trying to maintain financial stability. In a discussion like this, former officials may be able to speak more openly than they could while in their official positions. In this discussion, I felt like that did happen and especially in the Q&A session near the end. You can watch the full discussion here and below as well. Further below I have featured a key question that was asked and a summary of the replies from both Janet Yellen and Ben Bernanke to illustrate the kinds of concerns they have about the sustainability of our present system. That is of course something we try to monitor here.

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My added commments: I would call your attention to a specific question raised at the 1:10 and 36 second mark of this video. Here is the question that was asked by a former employee at the Fed who worked for both Janet Yellen and Ben Benanke:

I would be interested to hear Ben and Janet's views on whether these higher US debt to GDP ratios are a problem. With low interest rates, it is not obvious (that it will be a problem). I am interested in a loss of confidence, but is that an issue for countries that borrow in their own currency and with their own central bank (like the US with the Fed)?

The replies to this question from Ben Bernanke and Janet Yellen are worth your time to hear. This question is right at the heart of the issues we cover here and talk about all the time. I would note that this question comes directly from a former Fed employee. Let that sink in. The question is about the potential for a loss of confidence in our present system due to excessively high debt to GDP ratios. I doubt he asked the question thinking there is no such potential. 

I will let you listen to the replies rather than try to summarize them; but I can say that both former Fed chiefs agreed that there are major challenges facing our present system and that even a best case scenario in the US might look like how things have been in Japan for many years (stagnation with long term suppressed interest rates). I don't think either of these former Fed officials would even address a question like this while they were in their official positions, but were willing to talk honestly and openly here about their concerns about the risks to our current system in this discussion. 

This is why we try on this blog to encourage as many people as we can reach to understand that these issues are very important to all of us and will absolutely impact all our daily lives. 

How these problems are identified and resolved will impact us and we need to understand the issues as best we can to be able to be more informed voters and to prepare for any potential future adverse conditions that come our way if proposed solutions to our problems don't work as intended or if problems arise unexpectedly that were not foreseen.
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Added note for readers (8-21-2020): I will have two articles coming up in the next couple of weeks. The first will allow readers to take an in depth look at the pros and cons of central bank digital currencies (CBDC's). Later in early September, I will offer up an article that asks if we are headed into a wild 60 day ride heading into the Novermber US elections? Nothing should surprise us during that 60 day interval of time.

A Deeper Dive Into US Household Wealth Distribution & The Wealth Gap

It's election time once again and as always, the economy will probably be the biggest issue in most voters minds. This year will be extra challenging for voters to assess because the US intentionally shut down the bulk of its economy for a period of time in response to the virus pandemic. As of this writing, various parts of the economy all over the US are still fully or partially restricted. As expected, all this has sent national GDP downward and unemployment upward at historic levels. Voters will have make their own judgements about all that.

Setting that aside, one issue that has moved more into the mainstream of public debate is the issue of a perceived inequality of wealth distribution in the United States. Some refer to this as the "wealth gap". We try to avoid any political agenda here, so we will just try to focus on providing an accurate data base of information for those who wish to debate this issue. 

This leads us to this interesting set of graphs published by the Federal Reserve - Distribution of Wealth in the US Since 1989. These graphs are current up to the first quarter of 2020 which of course is just before the pandemic/economic fallout hit the economy. It will be interesting to see how that fallout may impact these statistics, but this is what we have available at this time. Below, I have listed some statistical facts based on these graphs that may or may not surprise you depending upon your perception of the "wealth gap".

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Go here to see the graphs - select by various categories including by generation

These stats just below are based on the graph showing distribution by % of wealth owned. We are comparing numbers based on three touch points in time (Q1 2004, Q1 2012, and Q1 2020):

2004 (Q1)

Top 1% owned 27.8% of total wealth (14.27 trillion over total of 51.40 trillion)

Top 10% owned 63.4% of total wealth (32.62 trillion over total of 51.40 trillion)

2012 (Q1)

Top 1% owned 29.3% of total wealth (19.38 trillion over total of 66.09 trillion)

Top 10% owned 68.8% of total wealth (45.47 trillion over total of 66.09 trillion)

2020 (Q1)

Top 1% owned 31.2% of total wealth (32.55 trillion over total of 104.30 trillion)

Top 10% owned 68.7% of total wealth (71.71 trillion over total of 104.30 trillion)

Some bullet point observations of the above statistical data:

- If we look at the Top 1%, they have had a steady increase over time of % of total wealth owned. However, they have dropped over a half of 1% since Q1 Jan 2017 when they held 31.8% of the total wealth at that time. 

- If we look at the Top 10%, we get a slightly different picture. They took a big jump up from 2004 to 2012 and then stayed somewhat flat with an increasing decline over the last three years. The Top10% have actually declined a full 1% since Q1 Jan 2017.

- Total wealth only increased about 30% from 2004  to 2012, but then soared from 66 trillion to 104 trillion the next 8 years (58%). It is worth noting that all of the latter eight year time period falls after the 2008 financial crisis and the expansive monetary policies (QE, asset purchases, etc) of the central banks were very active during this last 8 year segment of time. It is unknown how much of that monetary expansion may have contributed to the increase in total wealth.

- Contrary to what may be a common public perception, the wealth gap (if measured here by the % of wealth owned by the Top 10%) has not expanded much if any in recent years. In fact, over the last three years it has actually fallen a bit. Their total dollar amount of wealth has soared higher, but not their % share of the total wealth.

This last fact raises an interesting thought question. Is the public perception that the wealth gap is currently getting bigger based more on just the fact that their total dollar wealth continues to soar higher rather than on their actual share of total wealth? Beyond that, what will the gigantic further monetary expansion starting in Q2 2020 do to these numbers? Who will get all that newly created money?

Now let's switch focus to some stats on wealth distribution by generation looking at two touch points in time (Q1 2010 vs. Q1 2020). Let's look at how millennials have fared over that ten year time period since we have focused on millennials here lately. We will compare them with the Gen X generation.

2010 (Q1)

Millennials owned about one half of 1% of total wealth (.42 trillion over total of 60.81 trillion)

Gen X owned 9% of total wealth (5.48 trillion over total of 60.81 trillion)

2020 (Q1)

Millennials owned 3.4% of total wealth (3.55 trillion over total of 104.29 trillion)

Gen X owned 15.8% of total wealth (16.45 trillion over total of 104.29 trillion)

Some bullet point observations of the above statistical data:

- the oldest generations still own over 80% of all the wealth, but their share has dropped from over 90% since 2010

- It's not hard to see why many millennials may feel the present system has failed them looking at these statistics. Some will say it's natural for younger people to own less of the total wealth, but these numbers are eye opening. Millennials are 25% of the population, but only hold 3.4% of the total wealth. Also, while the youngest of millennials are in their mid 20's, the oldest are approaching 40 (see estimated population for each generation below). This seems like the biggest "gap" of all in this data because so many people are dividing up such a small slice of the total pie.

- Millennials have seen some bit of improvement vs. Gen X in the very last quarter reported on these graphs. The share of wealth owned by Gen X actually went down from 18.21 trillion to 16.45 trillion while the share of wealth owned by millennials went up from 3.19 trillion to 3.55 trillion. 

side note of interest: there are millions more Millennials in the US than were born in the US due to high immigration levels in that age group. It is projected that this will continue for awhile longer.

How many people are there in each generation you may ask? Here is that info:

Gen Z (2000-2020) - estimated 86.4 million (too young to own much wealth yet)

Millennials (1981-1999) - estimated 82.2 million

Gen X (1966-1981)- estimated 65.1 million

Boomers (1947-1965) - 71.2 million

Silent (1929-1946) - 23 million 

Greatest (1916-1928) - 1.75 million

click here to for the source of these numbers

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My added comments: Between now and November politicians and political operatives of all kinds will be arguing over this issue of wealth distribution and the perceived "wealth gap" as well as how to "fix" this problem. It is probably useful to have some idea of what the actual numbers are (per the Federal Reserve) while listening to these debates. Now you have them.                                       

Is the US Currently Conducting an MMT Lite Experiment?

Note to readers: The article below was prompted by the input my daughter gave me in a recent interview I posted here on the blog. I thought she had some thoughtful comments and raised some worthwhile issues to consider on the fairness of various economic systems that I believe are on the minds of many millennials today. With that in mind, I offer the article and questions below for your consideration in an effort to encourage an honest discussion of these issues for anyone interested in them.

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Recently, I have commented on this blog that it seemed to me that the US is already implementing a version of MMT (Modern Monetary Theory) with the central bank/government response to the COVID-19 pandemic. 

Perhaps another way to approach this is to ask: Is the US currently conducting an MMT lite experiment? We have the Federal Reserve stating that they plan to be near zero bound on interest rates for as far as we can see into the future. We have the Federal Reserve stating that their capacity to supply liquidity to the system in response to the current crisis is "unlimited". We have the Federal Reserve directly intervening in all kinds of markets with asset purchases.

I came across this article from last year in The New Yorker that examines the Modern Monetary Theory (MMT) as proposed by economist Stephanie Kelton. I encourage readers here to read this full article. Below I have extracted a few excerpts and further below I added a few thought questions that arose from reading this article along with a few comments.

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. . . "the basic principle of M.M.T. is seductively simple: governments don’t have to budget like households, worrying about debt, because, unlike households, they can simply print their own money. So M.M.T. proposes that the constraint on government spending shouldn’t be debt but inflation: How much new money can you pump into the economy before prices rise?"

. . . . 

"Onstage, Kelton lamented, “There’s so much pressure on candidates to pay for everything. I don’t see anyone—I mean, I’ll just be honest, I don’t really see any Presidential candidates putting forward ambitious agendas and saying, ‘We’re not going to try to pay for any of this.’ ”

. . . 

"Kelton often hears the same concerns about M.M.T., and most are about inflation. How soon will we become Zimbabwe, which printed so many Zimbabwean dollars that inflation peaked, in 2008, at an annual rate of ninety sextillion per cent? Never, according to Kelton; under M.M.T., the focus is sustainable inflation, whereas fiscal traditionalists worry about the deficit and don’t consider inflation at all. Doesn’t M.M.T. then require accurate forecasting of inflation risk? Yes, and, Kelton conceded at the festival, the models aren’t perfect, “but we can do a pretty good job.” And, anyway, government spending, she believes, is responsible for just a small part of inflation."


. . . 


"John Carney, is an economics columnist at Breitbart, who considers himself a “fellow-traveller” of the M.M.T. movement. “I think, functionally, Donald Trump has a lot of M.M.T. in him,” Carney told me. “He doesn’t think we need to cut Social Security. He doesn’t think that the deficit is a problem for the United States government right now. He thinks that if you can borrow cheaply you should and that interest rates should be low. Those are all positions that the M.M.T. people would agree with.” The idea for the job guarantee, he added, is “very close to what Make America Great is. We don’t want welfare, we don’t want handouts, we want good jobs for the American people.” Carney predicted more support for M.M.T. from the right once politicians realize that it can justify deep tax cuts.

This shift, if it is to occur, seems far off. Earlier this year, Alexandria Ocasio-Cortez publicly expressed interest in M.M.T. Subsequently, five Republican senators, led by David Perdue, of Georgia, introduced a resolution that sought to offer an official condemnation of M.M.T. The resolution demonstrated M.M.T.’s growing clout, but it also underscored the fact that Kelton’s battle is over M.M.T.’s legitimacy, not its politics. Allies are valuable. “Maybe just the fact that she’s e-mailing with a Breitbart editor is a sign that she wants a broad evangelism for M.M.T. and not just to be a darling of the left,” Carney said. But he noted that there are fraught political decisions to be made. “The way I put it is, can the government build a gun range? Is that an O.K. job-guarantee job? Can the job guarantee be used to build a border wall?

I asked Kelton if she worries at all about these fights, further over the horizon. “At the end of the day, what I really hope for is just a better debate,” she told me. “Let both sides put forward their best ideas.”

Please click here and read the full article in The New Yorker

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My added comments: After reading this article, the following thought questions came to mind:

1- Are the policies being implemented right now by the Federal Reserve in response to the pandemic crisis a "lite" version of MMT?

2- Is President Trump actually somewhat in agreement with some of the basic tenets of MMT as this article in The New Yorker suggests?

3- What is the wealth gap? What do the latest stats show about this gap? (you can explore that question by various categories using these pretty current graphs from the Federal Reserve)  -- (distribute the graph by generation to see why many millennials feel left out)

4- Do the current easy money policies of the Federal Reserve distort markets? If so, do we really have "free markets" Or do we have artificial markets propped up by central bank intervention (stock market, real estate, etc)?

5- Do these central bank monetary policies/interventions create artificial winners and losers and contribute to the "wealth gap"? If so, is that a true "free market capitalist" system?

6- How long can we use "unlimited money creation" policies before markets and the general public lose confidence in our currency and/or the monetary system itself? Years? Decades? Forever? (Stephanie Kelton says forever).

These are just some questions that come to mind. 

One thing we have learned here in our multi year study of these issues is that our present system is based primarily on public trust and confidence. Our currency itself is not anchored to anything in the real economy and floats adrift in a sea of exchange rates. We have lots of ongoing debate about that situation and also a lot of ideas on how to reform the present system if that is needed in the future.

So, in our view here, the real debate over MMT or other economic proposals is not as much about the actual technical policy alternatives as it is over - Who Do You Trust?

It all seems to come back to a fundamental question of human nature. Do you trust central planning authorities and experts or do you believe that human nature is somewhat flawed and that any system is vulnerable to abuse and corruption due to the flaws of human nature? 

If you lean towards the first camp, you are more likely to accept the idea that we can give governments and central planning authorities the power of "the unlimited ability to create money" and then trust that they will use that power responsibly and fairly. If you have a basic distrust of too much concentrated power in the hands of central planners, you will not likely trust them to administer any system responsibly or fairly and will seek ways to limit that power (this was the prevailing view of those who founded the United States).

This fundamental question is very important. Today we see much discussion about a "wealth gap". This wealth gap is viewed by many as fundamentally unjust and something that society must deal with. On the progressive side of the debate, we see a belief that if we will turn over power to central planners (such as the power to create unlimited money), they will use that power to fairly and responsibly rectify problems like the wealth gap. Opponents will counter that central planners are not inherently more moral or just than anyone else and cannot be trusted with that much power. They will say that those in power will tend to favor certain interest groups over others rather than to be impartial and the eventual result will be an even worse wealth gap.


Perhaps one way to address this debate is to just raise the thought questions below and leave it to readers to decide for themselves:

1- If we look at history, how have economies based on powerful central planners performed? Have they tended to improve the lot of the average person or not? Have they resulted in a more fair and just society or a less fair and just society?


2- Can we trust people in power (central planners) to be fair and impartial and not favor their political friends over their political enemies when making public policy? Can we trust them to make decisions without any personal bias? Can we trust that politics will not impact decisions that are made by powerful central planners? 


3- Using our present US monetary system as an example, have the policies of the Federal Reserve (our current central planner for monetary policy) resulted in free and fair markets and impartial results for the general public? Asked another way ---- Have the policies of the Federal Reserve tended to favor one segment of society over another and contribute to the current perceived wealth gap?

4- Does the soundness of our currency (its ability to retain its purchasing power over time) matter and does it impact the wealth gap; and therefore how fair our system is?


Economists will tend to argue over the merits of one set of economic proposals or another as being more "fair". At the end of the day, how we answer the fundamental questions above about who we trust and how we view human nature will determine our fate. That is our view here. We will continue to follow events and see what happens.
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Added note: This is the second article in a series of three related to how millennials view our economy and monetary system, how the wealth gap impacts them, and how to assess all the various political proposals they will see that are supposed to "fix" things (reduce the wealth gap). 

Upcoming is the last article in this series which will take a deeper dive into the actual numbers released by the Federal Reserve that allow us to analyze the perceived wealth gap. If you are going to discuss and debate this issue, it is a good idea to do so using the actual data we have as opposed to common public perceptions. This data is the Distribution of US Household Wealth since 1989 by various categories including % of wealth owned (Top 10%, etc) and by generations. Wealth in this data is total assets less total liabilities in the private sector (excludes government liabilities and assets). 

You can preview the charts we will look at here  that are updated through the first quarter of 2020. Here are some teaser questions to think about based on this actual data:

-  Is the "wealth gap" a real thing? Is it really currently getting bigger? 

-  Has the wealth gap actually expanded in recent years? (the last three for example)

- How much percent of the nations wealth do millennials own? 

- How many millennials are there? What is their share of the total population compared to their share of US household wealth? Is this why many millennials feel the system has failed them?

$1.5 Billion Just Doesn't Buy What it Used To (A Month Ago)

This blog is not an investment advice blog and also does not claim any kind of expertise in precious metals other than just some basic common knowledge. But we do monitor the precious metals markets for several reasons. For one thing, sharp upside movement in these markets has historically been a signal that something abnormal is going on and that confidence in the present system may be wavering. So, it's important to monitor it. With that in mind, let's explore some things going on.

How wild have things gotten in the gold and silver markets lately? Let's just take a look at silver for example.  Less than a month ago, we posted a news note in this blog article about precious metals investor Eric Sprott filing paperwork allowing his silver fund to buy up to $1.5 Billion in physical silver over the next couple of years. Several news sites mentioned this news and pointed out that this would be 75 million ounces of silver if the purchases were completed (silver was about $20 an ounce at that time). Boy, those were the good old days. As of the writing of this article (less than three weeks later) $1.5 Billion will only get you about 54 million ounces of silver at the current $28 per ounce spot price (except no one anywhere will sell you any significant amount of silver below $30 per ounce). 

Please let that sink in. In less than one month $1.5 Billion of US dollars lost nearly 30% of its purchasing power in terms of its ability to buy physical silver. But many people don't think silver has peaked yet for several reasons. Everywhere you look there are reports of tight silver supply and anyone wanting to buy silver in large quantity should expect long wait times to get it. Meanwhile, gold has surged to an all time high price in US dollars attracting mainstream media coverage. All this attention means millions of people all over the world who have paid no attention at all to precious metals as any kind of investment are suddenly interested. This includes various funds and larger institutions who own no precious metals at all as a hedge. In an earlier blog article, we listed several reasons people offer as to why this is happening in the precious metals markets. Those reasons are likely to remain in place for some time into the future.  

Silver in particular has lots more room to move higher percentage wise because while gold is at an all time high, silver is still far away from its all time high near $50 per ounce. Demand for silver in a variety of "green energy" applications is expected to grow alongside its demand as an investment hedge like gold. Also, as gold gets more expensive, silver seems like a more affordable alternative.

With silver already in tight supply, here is a bullet point list of some of the further future demand that we know about now:

- Eric Sprott wants to buy up to $1.5 Billion in physical silver (millions of ounces)

- the Kinesis monetary system is starting to come online in Indonesia.  Users in that system will be buying physical gold and silver (potential to add some significant new demand)

- hedge funds, pension funds, etc. are starting to dip into precious metals as a hedge, silver is a tiny fraction of the multi trillion dollar global investment portfolio (far less than 1%)

- "green energy" has to have silver to function- solar panels, electric cars, batteries, etc. Bank of America just projected a potential future silver price of $50 or more if VP Biden is elected President due to increased demand for energy platforms that use silver

- silver has antimicrobial properties that have medical uses in a world just hit by a pandemic

- millennials that previously were mostly focused on cryptocurrencies seem to be branching out in to precious metals, especially digitized token forms backed by actual metal

- as gold goes higher, silver looks more attractive as an alternative for the average person who wants an investment hedge, but gold feels "too high"

I am not sure if Eric Sprott had all this in mind when he filed for permission for his fund to buy $1.5 Billion in silver. But it looks like if he does spend that much, he won't be able to buy nearly as much silver as people talked about the day the filing hit the news wires. $1.5 Billion Just Doesn't Buy What it Used To (a month ago).   

My Daughter Offers Her Thoughts on How Millennials View our Monetary System

This blog is and has been devoted to watching for events that might lead to major changes in our monetary system. So far, we have not seen major changes to the US dollar based monetary system that is administered by central banks such as the Federal Reserve. This despite the fact that we have seen two major financial crises unfold in just the last 12-13 years.

One thing we have learned during this journey is that the ability to sustain any monetary system and any currency depends upon maintaining the public trust. Since modern fiat currencies no longer are anchored to anything related to the real world economy, public trust and confidence is everything.

As time goes by, my generation is starting to pass the torch over to a younger generation A generation that never lived during a time when national currencies were any different than they are today. So, it is clearly important to try and understand how this younger generation feels about our money and our monetary system. Do they trust it? Do they see it remaining unchanged for a long time to come? Do they see radical changes coming to it?

This blog has featured interviews with some of the leading experts in the world on these very same issues. This time I wanted to try and get some input from a non-expert from the upcoming generation. I believe this kind of input is invaluable because we need to understand what those who will take over from us are thinking and how they feel about the system we have and its prospects for the future.

I am happy to report that my daughter kindly agreed to do an interview with me to offer up at least one sample of opinion on these important issues. I was impressed with the time she took to think through the issues raised by these questions to offer her unvarnished, honest opinions. Below is the Q&A style interview with a few added comments just afterward.

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What do you think of as being money?

A: People my age have a reputation for "killing" lots of old industries and practices, and carrying physical cash is one of them. I'm accustomed to thinking of money in the abstract, represented by digital numbers and my plastic debit card as the tool to access them. Since I have an understanding of the fact that our money is no longer backed by the gold standard from growing up in your house and why that is problematic, I don't picture physical money when I think about our monetary system. I think it has evolved from everyone deciding what a certain piece of paper is worth to everyone agreeing that digital numbers on a screen are accurate.  I think of silver or gold as more like precious elements than money (more akin to diamonds) because they are so far removed from our monetary system.

Do you think the present economic system in the US is fair and provides equal opportunity for everyone? Why or why not?

A: I think no existing economic system is perfect and capitalism is no exception. As someone who values independence and self reliance, I believe capitalism is the best option available to us because it is the least restrictive. But I do think there are inherent problems and inequalities that emerge. For example, the inflated cost of education is crippling my generation and keeping us from building wealth. I also think that there is a cycle of poverty that exists in some communities or families not because of laziness, but because of lack of support or access to needed resources. I think major companies can quickly turn into monopolies and that wealth is concentrated within a small percentage of people. But I prefer those risks and challenges to the lack of opportunity available to me in other economic systems.

 It is worth noting that lots of millennials disagree with me, though. Because they feel oppressed by the system and economic hardships they have faced (many of us are underemployed for our degrees), they think a more socialist economy with built in support would benefit them. OR they genuinely think capitalism is harmful to certain populations and that socialism will better protect those populations. I disagree because I think no matter what type of system you have, there will always be inevitable greedy, selfish people who aren't concerned about the well being of others and would take advantage of any economic system, including socialism. I would rather have some people enjoy their concentrated wealth and leave me alone than govern or dictate what I do with my own money. So this question reflects my own personal outlook and I'm not sure if it represents the majority of my generation or not.

Do you trust that the money you have saved in the bank today will maintain its purchasing power five years from now?

A: Not at all. Inflation rises constantly. It might be a seemingly negligible amount over 5 years, but when you look at it over 20 years it is pretty shocking.

How does the high cost of obtaining a college education impact your life and your outlook for your future? 

A: My personal future is unique to this question because I studied hard and earned scholarships that covered the bulk of my education. My remaining debt still impacts me, but it isn't as utterly crippling as other students'. But only a small number of students are lucky enough to be awarded scholarships, so I'm going to focus on the problem as a whole instead of my own specific circumstances.

I personally believe this is one of the most devastating problems our generation faces, and until something changes it will make it difficult for all millennials to own homes, start families, or save for retirement. I think people from older generations don't always realize how expensive it is to obtain a college degree and how underpaid graduates are. According to https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic, the average cost of tuition and fees (not including housing, food, textbooks, etcc.) was $10,116 for the 2019 - 2020 school year. Multiply that by 4 and the cost for a Bachelor's Degree is $40,464. The average cost of tuition and fees at a private school for 2019 - 2020 was $36,801. That degree costs $147,204. That's the same price as a home, so imagine starting out your adult life with the same amount of debt as a mortgage, but without actually owning a home.

How much you can earn with that degree does depend on your field, which is a choice that you as an individual are responsible for. But as someone who has job hunted several times in the past few years, I can tell you confidently that there are thousands of jobs across multitudes of different fields that pay less than $40,000 per year and still require a Bachelor's degree. If earning a degree is the only entry ticket to your field and your family can't afford to pay $40,000 - $140,000 for your school, you are stuck with student loans. Those loans accrue so much interest that many students end up paying double the amount of the original loan and using half their lifetime to do so. It isn't sustainable. 

When you're stuck making payments of $200 - $300 per month for so many years (average student loan payment amount according to this source: (https://studentloanhero.com/featured/average-student-loan-payment-repayment-plans/), that impacts your ability to live comfortably or to save money for the future.

Is a college degree today worth starting out life with a large debt burden for the average student who must borrow significantly to pay for a college education?

A: It depends on your field. If you work in the STEM field, for example, it is worth it to earn a degree because your income will allow you to pay off your loans and still accrue wealth and save for the future. But if you aren't talented in a particularly well-paying field like that, I think a college education is becoming an unrealistic expense. I would advise students (and plan to advise my own children) that if scholarships are not available to them, they should earn a two-year degree at a community college in their field first. Then complete their Bachelor's Degree for two more years.

If their field of choice doesn't yield well-paying jobs, I definitely wouldn't advise them to earn a degree in that field. I do not think every student should waste money on college for an art or theatre degree for example if that isn't something they can already afford, because they won't be able to pay off their debt and live comfortably with a degree that doesn't offer them a lucrative career path. I would advise them to earn a trade certification or a different degree and pursue their passion alongside it rather than use money on it. I think a Bachelor's Degree has become more of a status symbol to some people than a tool, and it encourages students to waste their money on something that won't benefit them financially at all.

I value the experiences I had throughout my traditional 4 years away at school, but I think those experiences are more of a luxury than a necessity for starting out well in life. I'm speaking strictly from an economic perspective rather than an emotional one when it comes to the inherent value of a college degree. Until the price point changes or graduates' earning potential changes, I would advise anyone to proceed with caution before taking out too many student loans.

Do you think that the monetary policies of the central bank for the US (Federal Reserve) have any impact on your life? If so, in what way?

A: I'm sure they probably do, but I'm not well-versed enough in the policies to answer. I think most people younger than me (23 or so and below) would answer the same way. 

The US monetary system is based on people having confidence in the US dollar as its currency. Do you have long term confidence in the US dollar as money? 

A: No, I think inflation and our national debt are too problematic. Everyone just pretends the debt doesn't exist, but that power could shift someday.

Ten years from now, do you think the US dollar will still be the currency used in the US?

A: I would still consider 10 years to be relatively short-term. I think the dollar will still be used as currency within 10 years, and I think most millennials would agree with that and would be shocked to consider the alternative. But I think it is certainly possible our economic instability could change things sooner than I anticipate.

There is general agreement that a "wealth gap" exists in the US today. A wealth gap meaning that more and more of the wealth of the nation is concentrated in fewer people's hands. Do you have thoughts on what may have caused this situation? 

A; I think it is just a natural outcome of capitalism.

Do you think any policies by the US government or the Federal Reserve have contributed to this so called "wealth gap"?

A: Possibly, but I would need more context or examples.

Some argue that massive money creation by the central bank can contribute to the wealth gap because more of the created money tends to flow towards those who already own more wealth and wealth related assets like stocks and real estate. The argument is that those assets get inflated due to money creation and benefit those nearer the top of the wealth spectrum the most. Especially billionaires who own huge corporations and lots of stock in those corporations that may benefit disproportionately from the monetary stimulus injected by the central bank. (eg, Amazon, Apple, Facebook, etc). (see this recent blog article for an example of this theory)

Do you have any thoughts on that theory?

A: That theory seems valid to me. I can't pretend to be an expert on exactly how the flow of money works within our economy, so this is totally based on my perception of things. But I do get the sense (Iike we referenced in other questions) that money tends to get concentrated amongst extrememly wealthy people, and the money creation/inflation seems like it could definitely be part of the reason why our capitalist economy has such a massive and unfair gap.        

Millennials face a challenge because the US debt burden has grown substantially in recent years and as the "Boomer" generation retires, there are massive entitlement programs that have to be funded (Social Security, Medicare, etc). Do you think the US debt and its future entitlement obligations is a real problem for younger people or nothing to really be concerned about? 

A: It is a huge problem, because if the United States can't sustain social security for such a large influx of people and continues to create more debt, our money becomes increasingly less valuable. That matters from a global perspective. 

In general, do you think millennials are supportive of our present financial and monetary system or would prefer it be significantly changed? 

A: I think most people would prefer it be significantly changed because they do not feel that the present system has supported their best efforts to basic things like income stability, home ownership, retirement savings, and general wealth.

What changes do you think most millennials would want, if any?

A: Many people want more government regulations for large companies on a variety of different things. Healthcare, environmental protection, certain human rights regulations like requiring businesses to offer maternity leave as one specific example. Many people believe in the Bernie Sanders-type ideology that heavily taxing the billionaires and redistributing that money within government programs is going to make an impact on their lifestyle or on general poverty. 

I am a mixture - I do think there are situations where one standard set by the government would be beneficial (like certain specific environmental or human rights regulations). But I think too many restrictions like that chokes capitalism. And I don't generally believe in wealth redistribution because I think the government will do that inefficiently. I don't trust politicians with that money any more than I trust billionaires with it.

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My added comments: Obviously this is one sample of opinion and in any group there will be diversity of opinion. However, I feel like many of these answers are very much in line with what I see over and over from younger people who offer up their thoughts on these kinds of issues. 

I want to thank my daughter Julie for taking time to do this interview and share her honest views for readers here. I will add that if you happen to visit the Dallas Texas area (if and when we get to visit places again), Julie authors a blog on off the beaten path places you might enjoy. You can find her blog here.

Added note: Next week I will have a followup article prompted by the comments in this interview and after that an article that takes a deeper dive into the US Household Distribution of Wealth.