The Cashless Society

I confess that I don’t get Bitcoin. I don’t know if I should be embarrassed. I’m a financial professional, and I don’t understand one of the biggest financial fads of our time. Or is it a fad? What I observe is that the price of Bitcoin goes up and down like a whore’s pants. The first week in January the price was over $1100 (USD) and in less than two weeks it was almost down to $750, and then this past week it was up to $1200.  What I don’t understand is what stops the arbitrary creation of Bitcoins. What stops the issuer from creating more of them to feed the market, pocketing the sales proceeds. What prevents Bitcoin inflation?  What drives the price up and down? Psychology I suppose. But what are the factors that trigger that psychology?

Maybe somebody reading this will inform me.

In a world going cashless, such cash substitutes will likely grow in appeal. Sweden reports that only about 2% of payments are in cash. Australia, Turkey and Rwanda are close to achieving that low percentage. Governments of several nations are aggressively seeking to eliminate cash: India, Pakistan, Austria, UK, France.  Who knows why?  Well, I think we can guess. When you have to pay digitally, records are made. Your spending habits are manifested in those records. Your interests and preferences and your habits are there to discover.

The millennials --- Generation Y --- a large generation of children of the large baby boomer generation, seem to be all for it. They are the first generation that grew up with digital methods firmly entrenched in their lives. Maybe they don’t value privacy, accustomed as they are to Facebook and other social websites that make their lives translucent, if not transparent.  

I do not know how problems associated with a cashless society --- lack of privacy and also then ones identified at http://gordonfeil.blogspot.ca/2016/11/the-war-on-cash-and-on-you.html --- can be resolved. 

China Continues to Bleed Dollars

I see today that Chinese dollar reserves have now broken below the 3 trillion dollar level. That may seem like a lot, but it is alarming.  As I commented at http://gordon-feil-economics.blogspot.ca/2017/01/china-is-going-broke.html, the combination of illiquid dollar investments and cushion needed to bail out the troubled Chinese banking system, reduces the useable reserves to probably about a trillion. They blew through 800 billion dollars last year, so this remainder isn’t much.

Chinese export of dollars has ultimately chased U.S. treasuries. This has had the effect of putting downward pressure on U.S. interest rates. When there is a demand for treasuries, the price goes up, and it is the difference between the price paid and the redemption (face) value that constitutes the effective interest. High buying pressure narrows that gap and reduces interest earned.

China is losing its ability to export U.S. dollars, and that means less dollars chasing USA debt, so this would tend to make interest rates rise. I suspect that the Trump administration will pressure American banks to use some of their huge reserves to buy that debt though. I also suspect that China will do a MASSIVE devaluation of the yuan to attract dollars back.

China has problems besides its currency and hemorrhage of capital. Trouble with its neighbors. Trouble with Trump who is plain spoken and doesn’t pussy foot around the issues that bother him. A huge debt bubble ready to pop.

I’ll say it again: China is in major trouble. It looks like friendly relations with the USA will be ending. Chinese culture does not like direct embarrassing communications. It wants to save face.  Trump isn’t one to play that game.  The Chinese may get aggressive to save face. There may even be military action.

Gold Shortage, Canadianreal Estate Bubble, War on Cash, and China Going Broke

Just combing through some of the news of the last couple of months. 

Gold mining companies have not been exploring aggressively in the last several years because of declining prices. These prices are largely determined on the synthetic market.  Gold has a physical market (buying and selling of actual metal) and a synthetic market (buying and selling claims on metal). The physical market participants largely TAKE prices while the synthetic market traders MAKE prices. By manipulating prices lower, sellers into the larger synthetic market have depressed the price of the metal in the smaller physical market. Eventually the chickens will come home to roost. People will catch on to the truth that there is a shortage of the metal and sellers in the synthetic. For more, read the Bloomberg article at https://www.bloomberg.com/news/articles/2016-12-21/gold-miners-are-running-out-of-metal-five-charts-explaining-why.

An article in The Telegraph in the UK identified Canada and Sweden as two real estate bubbles.  http://www.telegraph.co.uk/business/2017/01/02/fears-massive-global-property-price-crash-amid-dangerous-conditions/. I expect that as interest rates rise, and mortgages renew with significantly higher payments, selling pressure will rise also. 

At http://gordonfeil.blogspot.ca/2016/11/the-war-on-cash-and-on-you.html we discussed the move to eliminate cash. At http://www.bbc.com/news/business-38377765 we read that Pakistan is doing so also just like neighbor India. The European Union, Australia and Venezuela are also going down that road.

At https://www.bloomberg.com/news/articles/2017-01-03/china-drills-down-into-forex-transactions-as-money-exits-abroad is an article about China’s slide into insolvency. I have written about that trend at http://gordon-feil-economics.blogspot.ca/2017/01/china-is-going-broke.html and at http://gordon-feil-economics.blogspot.ca/2017/01/china-is-going-broke.html.