President Trump has drawn intense criticism for disparaging comments directed towards the Federal Reserve Bank (FED). Defenders of the FED cite its role as an independent entity that should not be mixed with politics. I could not disagree more with this argument as there are a multitude of reasons for shutting down the FED. Central banks, like the FED, exert unwarranted control over the money supply (which does not benefit the average American). Here is an example of fractional reserve banking, facilitated by the existing system, leading to the creation of money out of thin air:
'Since 97 percent of fiat currency is loaned into existence by commercial banks creating loans through the fractional reserve banking process, the money supply continues to grow. Not only can CBs [commercial banks] create fiat currency from nothing, but they can buy U.S. government debt with that money and keep the interest to make a risk-free profit, which even adds to the CBs’ capital.'
The middle class in the U.S. has been negatively impacted by faulty monetary policy for decades. From 2008 to 2016, near 0% interest rates hurt savers the most. Meek job growth was coupled with rising asset prices like real estate. Americans that could not keep up with paying for basic needs (groceries, rent, etc.) were forced into debt. Some evidence of the dire circumstances facing a great segment of Americans:
- According to a FED report, about 40 percent of adults in the U.S. said that if faced with a $400 unexpected expense, they would either not be able to pay it or would do so by selling something or borrowing money
- Almost 1 in 3 U.S. households have challenges paying energy bills
- About 40% of the American middle class face poverty in retirement
- 1 in 3 Americans have hardly any retirement savings
- Those over 65 have been filing for bankruptcy in droves
- Health spending per capita in the U.S. increased nearly 29 fold in the past 40 years, outpacing the growth of the economy
Whether one supports the FED or not, clearly, the current system is not working well for 35% - 40% of Americans (many of which represent the Trump base). Further education and job training may help mitigate the circumstances for some but would in no way fix the underlying problem. A radical change (not towards socialism) to the current system of central banking in the U.S. is required. President Trump's experience and unpredictable, combative style make him the ideal person to enact this radical change. The FED (via rate increases) is actually a partner in the strategy to defeat China economically that has yielded encouraging results. So, the President's recent comments that the FED is 'crazy', raising rates 'too fast' and his 'biggest threat' are somewhat confusing. In reality, these remarks signal the closing stage of an ongoing war against the financial-media-military industrial complex (which includes the FED). It is a precursor to the President's plan to set up the FED and blame them for any sort of economic decline. I outlined this in January of 2017:
I believe Mr. Trump will try to push through all of his economic programs on the assumption that the Federal Reserve will keep interest rates low and continue to print massive amounts of dollars as needed (they did it for Obama, right). If the Federal Reserve obliges then great - infrastructure is restored, the military is strengthened, taxes are cut - all with printed dollars at no cost and limited inflation!! Well, unfortunately, there is virtually ZERO chance of this happening. China will no longer be allowed to provide short term support at the expense of losing strategic assets (see here). The massive size of the federal debt (see here) and ongoing deficits will make these policies impossible to implement.
Which brings us to Plan B (which is really the only plan) - Blame the Federal Reserve. Trump can say he tried to get his plan through but didn't get the support of the Federal Reserve. He can then claim that we need a 'new system' in place. That is where some kind of gold standard will come into play.So, what happens if there is some kind of major financial crisis (i.e. Deutsche Bank, Chinese banks, etc) during his term. Same thing - Blame the Federal Reserve. Do you really think Donald Trump is going to protect the banks that he ran against??
The President has progressed towards meeting my criteria to be a successful president. The three conditions include preventing a world war, ending the FED and draining the swamp by rooting out corruption in government. His efforts to expose and defeat the deep state are commendable. But, to dispel any notion of 'hero worship', the President is just a guy from Queens (like myself) who happens to have a lot of money (unlike myself) and who should not receive any sort of special treatment. Suggested policies like the privatization of spying require greater scrutiny. The U.S. does not need to trade one deep state for another one.
So, once the FED is dissolved, restructured or phased out, the main question is what system will replace it (or co-exist with it). At the time of my original post, I assumed that gold would be the most likely replacement. Now, cryptocurrencies have been added as a potential option. We are seeing a new paradigm as evidenced in countries that have a currency in danger of devaluation (an official lowering of the value of a country's currency within a fixed exchange rate system). In the past, people would line up at a currency exchange center to exchange their local currency for a more stable one (i.e. USD, EUR). Now, people can also go online, open an account on a cryptocurrency exchange and buy Bitcoin. Similarly, depositors are no longer vulnerable to 'haircuts' like those in Cyprus who lost 47.5% of their savings exceeding 100,000 euros back in 2013. We are seeing instances of greater implementation of cryptocurrencies in economically troubled regions like Venezuela (Dash) and Iran (Bitcoin). Cryptocurrencies may represent an even greater threat to ruling governments (and their central bank enablers) than gold since they are more difficult to confiscate. Still, we have not yet seen mass adoption to further validate them as a viable means of exchange.
For those of you who are still hopelessly negative about cryptocurrencies, I would refer you to a statement made to the U.S. Senate Banking Committee by J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission:
'We are entering a new digital era in world financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination.'
For years, the precious metals markets have been subjected to manipulation as exemplified by the Deutsche Bank settlement. We still often see obvious examples of this via futures trading on the COMEX. I previously asserted that Wall Street had limited resources for manipulating cryptocurrencies. Unfortunately, we are seeing hints of market rigging in the exchanges. When the crypto exchange BitMEX performed scheduled maintenance on its trading engine, the weight of shorts were alleviated off the shoulders of the crypto market and Bitcoin saw an immediate surge of buying volume, rising from $6,450 to $6,720 within a minute. Also, popular exchange Coinbase, was recently found to have the highest level of own trading. [Own trading is also called proprietary trading and defines a situation where an exchange trades against the sell orders. In other words, the crypto exchange buys instead of connecting sellers and buyers.] Exchanges like these are indirectly suppressing the price of Bitcoin (and other cryptocurrencies) and creating even more market distortions. Industry success vitally depends on overcoming this manipulation.
Bloomberg highlighted three potential scenarios for Bitcoin:
- No. 1. Bitcoin Triumph: Bitcoin replaces the dollar (and probably other fiat currencies as well) as the economy’s main unit of exchange. People buy pizzas, finance their mortgages and pay their rent in Bitcoin.
- No. 2. Bitcoin as Gold: Fiat currency remains the main unit of exchange everywhere except in a few extremely dysfunctional economies like Venezuela’s. But Bitcoin’s market capitalization remains substantial, and it rises in value over time, occasionally experiencing large bubbles and crashes.
- No. 3. Bitcoin Bust: Bitcoin is abandoned, crashing relative to the dollar and never being useful as a payment method for daily necessities.
In my opinion, Bitcoin (and cryptocurrencies in general) is currently positioned at scenario #2. Scenario #3 does not appear likely and scenario #1 will require more time for the technology to improve. Remember that in the late 1990s, transfer rates of an Internet connection were nowhere near where they are today. In the near term, another price spike could help defuse the massive U.S. debt bomb and create a wealth effect to support the economy. Tom Lee, Managing Partner and the Head of Research at Fundstrat Global Advisors, previously estimated a $25 billion windfall in capital gains tax revenue for the U.S. government in 2017.
The U.S. dollar is a terrible currency. But, the one caveat is that most (if not all) other countries have currencies that are worse! According to the World Economic Forum, the U.S. is now ranked as the world's most competitive economy for the first time since 2008. The rise of interest rates by the FED has hurt emerging market economies far more than the U.S. Even European banks have significant exposure to emerging market debt. There have been rumblings that dollar credit will seize up globally and unleash a 'derivatives volcano'. So, it is unclear when (if at all) this ongoing global currency reset will impact the U.S.
One thing is 100% certain, the existing fiat system is doomed and no country will ever be able to effectively devalue its currency (and prevent hyperinflation) with options like Bitcoin available. Even more important - there is no way the U.S. can consider itself a 'free' country when the ultimate power remains embedded with a cadre of bankers. The use of cryptocurrencies reinstates power to the individual in place of the state. Ultimately, there will be a choice for Americans - accept the status quo or take an unknown path with the possibility of a better future.
This post originally appeared on News with Chai blog.