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Billionaire Investor Ray Dalio Bearish on Cash Says Central Banks Drive Economy

Billionaire investor Ray Dalio, the Founder and CIO of Bridgewater Associates, asserted that since the 2008 Financial Crisis, the behavior of central banks like the Federal Reserve demonstrates that capital markets are no longer free.

Ray Dalio believes that the Federal Reserve no longer operates within the traditional economic system and is now the market maker. He also expressed that the traditional valuation of cash has been thrown out the window and will make the US dollar less attractive as a reserve currency.

Central Banks Drive Capital Markets

In an interview with Bloomberg, Dalio argued that capital markets are no longer free as they are now driven by the shifting priorities of central banks to own assets they buy and sell.

Dalio told Bloomberg that capital markets, “Are driven by central banks not only their actions but their desire to be an owner of those assets. Their priorities about that ownership when they buy and when they sell are not the same as the classic free-market allocations,” leading the billionaire to conclude that, “The capital markets are not free.

The billionaire highlighted that the Fed’s behavior has changed from putting money on deposit for banks to borrow and lend out—which fuels the traditional credit system and creates fair competition for financial assets—to asset ownership. Consequently, Dalio asserts that the economy and markets are primarily driven by the ownership of assets by central banks.

US Dollar as a Reserve Currency?

Dalio explained that the Feds transition to market maker and the current capital market environment was a consequence of the 2008 Global Financial Crisis. He did concede that without the Fed taking on this role large parts of the US economy would have failed.

In the interview, Dalio also highlighted his concerns for the US dollar as a reserve currency as the flood of cash clearly indicates that the traditional method of valuation no longer applies to cash.

Dalio has been known to be bearish on cash as a reserve currency but still believes cryptocurrencies like Bitcoin are too volatile to be considered as an alternative. He also previously noted that reserve currencies go through cycles and that, just as the British pound was the world’s reserve currency before the US dollar, so too the dollar is now facing reserve status challenges by China.

Goldman Sachs Warns Inflation Threatens US Dollar’s Role as Global Reserve Currency

Goldman Sachs investment bank has said that the US dollar risks losing its position as the world’s global reserve currency, as revealed by the recent surge in gold prices. Goldman Sachs analysts wrote in a note to clients that gold would be the currency of the last resort, especially in the current environment where governments are debasing their fiat currencies.

Gold’s Rally Highlighting Global Economy Concerns

The record high in gold prices is raising questions regarding the US dollar’s future as the world’s reserve currency. The prices of gold raised much attention as the asset climbed to $1,931 an ounce, the highest settlement in history.

While the incident influenced the crowd to expect $2,000 an ounce soon, Goldman Sach forecast expecting $2,300 an ounce within the next 12 months. The investment bank also lifted its silver outlook from $22 to $30.

According to Goldman analysts, there are many factors pushing the gold price higher, including fear of increasing political uncertainty, rising concerns involving another spike in COVID-19 infections in the country, increasing government debt, rising inflation, and concerns that the US dollar is seeing a new downtrend to the Chinese Yuan. The analysts said that the debt building up as a result of the coronavirus epidemic may lead to debasement fears.

The analysts see the potential for higher inflation as governments debase their fiat currencies to deal with rising debt. Debasement risk is increasing as a result of the rising debt built up by policymakers seeking to combat the economic impact of the coronavirus.

While gold is not the best hedge against inflation compared to other commodities such as base metals and oil, the analysts stated that it is the best asset in the current environment since it appears that inflation would be driven by currency debasement.

The idea that the U.S dollar may one day be seen as less of a safe-haven currency jeopardizes its status as the world’s reserve currency, a role that has given the U.S financial system a great advantage in the global financial markets for several decades.

Gold is seen as a safe commodity because it is in limited supply and regarded to have inherent value. This implies that fears of inflations as well as other economic turbulence such as the COVID-19 recession could drive up the demand for gold.

The analysts stated that inflation risks remain low today. However, a confluence of factors coming together could push inflation up in the future. Among such factors include record-low interest rates, which are new steps taken by the Federal Reserve to expand its balance sheet and rising debt.

The End of the U.S Dollar’s Global Dominance?

Several observers believe that the world is witnessing the start of the end of the dollar’s role as the world’s reserve currency. There are a number of interrelated factors that support this view like the soaring U.S trade deficit, Americans not saving enough, and others. The current trends are putting the U.S dollar’s role as the world’s dominant currency at risk.

The dollar’s share of the global reserve is declining, while the Chinese yuan and the euro are becoming more popular. Both market volatility and politics can be blamed for the dollar’s loss of market share. Some central banks actively resorted to diversify their reserves to move away from the dollar’s dominance because of actions of the U.S. But it is too early to say that it is the beginning of the end of the dollar as the world’s reserve currency.

Reserve Bank of Australia Meeting Finds No Strong Case for CBDC or e-AUD

The Payments System Board of the Reserve Bank of Australia (RBA) has found no strong public policy-case to issue a central bank digital currency (CBDC) despite the trend of declining cash-use throughout the COVID-19 pandemic.

A meeting of the Reserve Bank of Australia’s Payments System Boards was held today, to discuss the impact of the COVID-19 pandemic on the Australian payments ecosystem and the subject of issuing a CBDC, among other issues.

According to RBA release on Aug 21, Australian payments systems operators and retail payments have proven resilient throughout the COVID-19 pandemic disruption to the economy as have financial markets infrastructures. High on the RBA’s discussion was the declining uses of physical cash and the potential of a central bank digital currency.

Reserve Bank of Australia Deems CBDC Unnecessary

Digital payments services have come to the forefront for economies globally as the disruption of the highly infectious COVID-19 virus has led to decreasing use of physical cash.

Like the United States and China, as well as a host of other nations—Australia has floated the idea of a central bank digital currency or the e-AUD. However, discussions in the meeting of the RBA’s Payments System Board concluded that there was not a strong enough case for a retail central bank digital currency given the competitiveness of Australia’s current cashless systems.

Per the Reserve Bank of Australia’s announcement:

“Consistent with previous discussions, members considered that at present there is not a strong public-policy case for issuance in Australia, given that the electronic payments system in Australia compares very favorably with those in many other countries and access to cash remains good.”

The Payments System Board will continue to monitor the global payments ecosystem and continue research on the CBDC technology and policy.

The meeting reports said:

“The Board will continue to closely watch the experience of other jurisdictions. The Bank is continuing to research the technological and policy implications of a wholesale form of CBDC and is working to develop a proof-of-concept with external parties to explore aspects of wholesale CBDC, building on research the Bank did in its Innovation Lab last year.”

Public Companies Now Hold Almost $7 Billion Worth Of Bitcoin

At the time of writing, there is almost $7 billion of Bitcoin currently held by 13 publicly listed companies. Companies including Grayscale, Galaxy Digital, Microstrategy, and Square, are among the largest holders of cryptocurrency, as businesses react to a change in sentiment towards Bitcoin and other cryptocurrencies.

Several high profile influential figures that have previously cast doubt upon cryptocurrency are now also changing their tune, as blockchain technology becomes an undeniable force for innovation.

Gold has historically been the go-to as a hedge against economic uncertainty, but the rise in adoption of Bitcoin has grown exponentially throughout the last decade, drawing the attention of some of the biggest names in tech.

Jack Dorsey, CEO of Twitter and payments processing service Square, publicly tweeted that Square had invested $50 million of the company’s holdings into Bitcoin, along with details of how other publicly traded companies could do it too.

Grayscale has been stacking huge amounts of Bitcoin on behalf of clients over the past year, with a total of 449,596 BTC under management in its BTC trust.

Software giant Microstrategy currently holds 38,250 BTC, the second-largest holding of cryptocurrency than any publicly traded investor, other than Grayscale. The holdings also mean that an array of shareholders are also indirectly exposed to cryptocurrency as Bitcoin makes the company’s balance sheet.

Interestingly, the government of Norway holds a 2% stake in Microstrategy, meaning that all Norwegians are now also exposed to Bitcoin indirectly.

Investments by the publicly traded companies on this list are proving to be a catalyst for the demand of Bitcoin on an enterprise level, and we can expect to see this list keep growing.

Central Banks Doubt Cryptocurrency Limited Role in Reserve Operations

According to a Swiss-based UBS investment bank survey, central banks are sceptical to cryptocurrencies and supplant gold as a safe store of value.

UBS’s research surveyed 30 major central banks. The study shows that almost 85% of central bank reserve managers do not expect crypto-assets to replace gold in their currency reserves.

Furthermore, over 25% of the central bankers stated that Bitcoin and other cryptocurrencies have the markings of investment, potentially as uncorrelated assets which do not move in tandem with other markets. The study further shows that 57% of those polled mentioned that they do not expect crypto tokens to impact their reserve operations significantly.

However, analysis like Joshua Scigala, Co-Founder of decentralised crypto finance project TheStandard.io, disagree with central banks’ stance on the role of cryptocurrencies, he said:

“When I hear Central bankers state that they don’t see much role for cryptocurrencies as a store of value over gold, it shows a complete lack of understanding. Cryptocurrencies are incredibly diverse and enable many functions that will leave central banks looking like dinosaurs if they do not keep up.”

Yet, there is a different story as several crypto advocates see cryptocurrencies as a way to preserve the value of their savings at a time when central bankers across the globe unveiled massive stimulus packages to fight the COVID-19 pandemic amid rising fear of higher inflation.

Meanwhile, cryptocurrency volatility has distanced several traditional investors from the asset class and affected its attraction as a stable store of value. Luke Sully, CEO at treasury technology specialist Ledgermatic – a company that allows corporates to hold and use cryptocurrencies compliantly, explain:

“Bitcoin as a foreign currency reserve cannot be publicly supported by any central bank for one simple reason; that it is not controlled by any nation-state. Aside from El Salvador, which recently permitted bitcoin as legal tender in the country, it’s mostly used by investors – retail and institutional – as a high-risk investment. “

Central bankers’ cautious sentiment comes when the crypto industry’s growth has exploded in recent years and has prompted regulators to contemplate more seriously how to regulate such assets and to what extent they should play a role in their operations.

While central bankers have doubts about the role of private crypto assets, they are increasingly confident about the prospect of the Central Bank Digital Currencies.

The research shows that central bankers are optimistic about the outlook of CBDCs as they consider how to respond to the booming of the crypto sector. More than 80% of central bank reserve managers stated that they expect such institutions to develop CBDCs directly accessible to consumers over the next five years.

Officials surveyed said that central bankers’ motivation to pursue their digital currencies is to enhance the retail payment system and upgrade the broader financial infrastructure, including major functions like clearing and regulations. They also mentioned that CBDCs could assist in reducing money laundering and crime.

CBDC As Opportunity for The Monetary System

Central bankers are accelerating their work on CBDCs’ development, and investors are making observations.

About 80% of central banks are researching the use cases involving CBDCs, with 40% (such as China, Australia, Singapore, Japan, Thailand, and others) already testing proof-of-concept programs.

Facebook-based cryptocurrency Diem is motivating several central banks to create CBDCs. Diem, formerly Libra, formed a partnership with Silvergate bank to test the US dollar-pegged stablecoin later this year.

The creation of Diem has been regarded as a catalyst for China to accelerate its plans for its digital yuan issued by the country’s central bank.

China is close to launching its CBDC and is testing the digital yuan with commercial institutions and the public. The country maintains plans of establishing itself as a key player in the emerging global digital currency market.

In contrast, the US Federal Reserve is taking a more cautious approach to issue a Central Bank Digital Currency with no robust commitment to date.

Cambodia and the Bahamas are the only countries that have so far launched their CBDCs for public use.