Food For Thought: Digital Dollar & Money Velocity
For an audio version of this post, please click on the speaker icon (top left).
I enjoy perusing the web and reading blog posts and articles that catch my eye.
Some of the great posts I have come across I share with my readers through my Grand Rounds series.
Sometimes a particular passage in an article is thought provoking and I thought I could highlight/elaborate on it in a dedicated post.
The inspiration for this post actually came from a YouTube video my radiology partner shared with me.
I am going to say that my stomach got a bit queasy listening to the topics they were discussing because of the far reaching implications for my financial future/retirement.
Whether any of what they discuss actually occurs in real life or not is debatable.
But it is good to listen to contrarian views to your own so that you are aware of potential pitfalls in your strategy.
The following is the video in its entirety (this post concentrates on the first portion discussing digital currency).
I realize there may be a decent percentage of my readers who would rather have the abridged “Cliff Notes” version from this podcast and I will be happy to oblige.
No, this was not a discussion about current popular forms of cryptocurrency, such as Bitcoin or Ethereum.
Rather, the main focus was the long-reaching effects that could occur when some sort of digital currency is officially issued from the United States government.
I personally think it is only a matter of time before central banks all over the world, including the US, will implement digitization of money.
It was therefore quite interesting to see some potential scenarios that could impact my future finances.
The Digital Dollar.
On face value, it does not seem like this transition would cause much of an issue but on deeper analysis the financial implications are staggering.
“It gives the central bank direct and immediate control and the vision to see if their policy choices are doing what they want.”-Lynette Zang
A perfect example of the current disconnect between the government and the monetary policies it is trying to implement and what actually happens is the $1200 stimulus checks that were issued during the pandemic.
The government was trying to “stimulate” the economy during this time, hoping these stimulus checks would be used by its citizens to increase the “velocity of money” by spending it back into the economy.
However a significant portion of the population saw potential troubling times ahead because of the pandemic and actually saved the stimulus money instead of spending it back into the economy like the government had hoped.
This slowing of the velocity of money, money being saved/hoarded rather than spent, could lead to the economy contracting and initiating a recession.
So how does a Federal Digital Dollar factor into this?
Digital currency also gives the Federal Government an almost George Orwellian “Big Brother” type ability to monitor the finances of its citizens.
“[With digital currency] the Fed… is able to monitor every single transaction… that you do…”-George Gammon.
I know some of you may be thinking, “Aren’t we already in a digital economy right now?”
It’s true that most transactions we go through on a day to day basis do not require us to physically handle currency.
A desired transaction can be enacted with a touch of a button and carried out in an instant by 1’s and O’s in the virtual world.
But this digital form is far different from the digital system that is currently being proposed in a bill that is being rapidly pushed through with a deadline of January 1, 2021.
With our current system we have ownership of the money and can decide if, when, and where to spend it.
With the proposed federal digital dollar there is potential that the government can force you to spend it by:
- Enforcing a negative interest rate on those funds (you actually will lose money if you try to hold on to it).
- Granted this can also occur with non-digital currency as evidenced by European nations.
- Enacting an expiration date type system where if the money is not spent it is forfeited.
By forcing consumers to spend to avoid losing principal, the Feds get their wish by increasing the velocity of money and expanding the economy.
But there is a price to pay and that price is paid by the consumer who would be discouraged to save if these scenarios do indeed come to fruition.
Resistance is futile?
As Lynette Zang implied, the transition/implementation to a digital dollar may be quite insidious.
We may be seduced by the Feds to adopt this digital dollar early on when there is no perceptible difference between it and traditional money.
However once that transition is made, it may be difficult to convert it back.
You are then forced to bide by any rules created to push the desired monetary policy forward.
A question for you.
So what are your thoughts on the proposed digital dollar?
Do you share the concerns of the podcast or do you think it is overreaction/conspiracy theorists at work?
If given a choice, would you voluntarily go with the digital dollar?
Please comment below.
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