Digital Currency: Do You Rely On It Too Much?

Audio Blog, 12:50

Right now, how much actual cash do you have in your wallet/purse, or in a secret hiding space? If the amount wouldn’t cover one week’s worth of expenses, you probably rely on digital currency a bit too much.

During my summers in college in the late 1980s, I had a job as a waiter at The Chesapeake Bay Seafood House in Burtonsville, Maryland. The attraction of the business was that customers could pay $19.99 for All-You-Can-Eat seafood, including Alaskan King Crab Legs, Spicy Shrimp, Scallops, Oysters, Clams…you name it!

The veteran waiters knew that the key to the job was to anticipate what item your customers would want next, and then to take the initiative to bring it out before they even asked.   Of course, the rookies waited until the customers actually asked for the item before they brought it out. That guaranteed a night “in the weeds”, as waiters called it, when you were overwhelmed with customer requests.   There was nothing more stressful.

If you provided bad service, then you probably would get “stiffed” when they paid the bill. That meant your tip was zero. Goose egg. Nada. Zilch.  However, if you were personable, friendly and timely, you were sure to get a nice-big-fat-tip. Daily cold hard cash…

I think back to those days when I notice how little we rely on Actual cash these days, and I wonder if it is wise to place so much faith in the concept of virtual wealth.

If you are like most people, you get paid electronically every couple of weeks. The money is deposited in your bank account, and then you pay bills online or via credit card, thereby actually touching only a fraction of your earnings. When you want to buy something, from lunch to a new washing machine, it’s done with a quick swipe of the plastic. We can even use a credit card in the soda machines now, a whopping $1.25 purchase using credit! You start to believe that maybe we should eliminate the actual currency of bills and coins, since this works so well.

Millennials have pushed the envelope of digital currency, are the primary users of smart phone applications like Venmo, Apple Pay, Snapcash, as well as creative fundraising techniques such as Crowd funding.

In 2009, the crypto-currency Bit Coin hit the scene, as an alternative form of money that is difficult for Uncle Sam to monitor. Users can send and receive bit coins anywhere in the world via wallet software, personal computer, or mobile device. As a form of payment, its fees are 2–3% lower than most credit card processors.

Even conservative corporations have focused on developing stronger electronic commerce platforms, as opposed to the old-line manner of conducting business.

Overall, it is clear that the economy, and individuals, have moved far away from the actual cash currency that I loved to count back in the eighties.

When someone wants to invest in the ownership of a publicly traded company, via stock market, the trade settlement is now done electronically, without a paper certificate that used to be provided to the investor. A simple electronic entry on the computer screen is all that the investor has to show for the ownership.

There is absolutely no doubt that electronic commerce and investing is highly efficient, incredibly accessible and far cheaper and easier to administer.

But unlike cash, digital currency always has a “counter-party” risk associated with it. In other words, it relies on something, or someone, to utilize it. This is the basis for some of my genuine concerns below, along with a few suggestions on how to mitigate the risks.

Reliance on hardware systems.   Access to digital currency relies on ATMs, computers, servers, iPads, iPhones, and a wide array of hardware systems. If those systems are inoperable for any reason, the virtual wealth is worthless at that moment.

The best way to mitigate the hardware failure risk is to establish “grandma’s ole cookie jar”. It doesn’t have to be a lot of cash, but make sure that your family has unfettered access to at least one week of “survival cash”, held in a location that you have freedom of movement.

Reliance on power. Without freaking you out, I will simply say that a sustained loss of power in this country is inevitable. We often think of causes like Hurricane Katrina and excessive heat-triggered blackouts, but there are real concerns from experts and public officials about crippling attacks on our power grid. If you want to really alarm yourself into appropriate preparation, read the 2015 book “Light’s Out” by the well-respected veteran journalist Ted Koppel.

The recommended way to mitigate the power grid down scenario is mental and physical preparation. Think through the scenario and identify what resources are available to get you through it. It certainly includes “grandma’s ole cookie jar”, as cash can buy goods immediately after a power loss. But this scenario is very complex, and at the expense of sounding too depressing, it is better to become fully aware of it now.

Start by remembering the basic “Rule of 3s”. You can last three minutes without oxygen, three days without water, and three weeks without food. Oxygen…well, no suggestions on that one. However, regarding access to water, always remember that most homeowners have 60+ gallons of drinkable water in their water heater tank in the attic, with the exception of people with high efficient tankless water heaters.  In addition, it is always wise to have extra cases of bottled water. For food supply, canned goods or freeze dried food has the longest shelf life. Anyway, I will move on now, so not to turn this into a “Doomsday Prepper” article…

Vulnerability to Cyber Crime. Unfortunately, with the benefits of electronic commerce and wealth, come the negative costs. It is well known that hackers are actively stealing money and information on an unprecedented scale. Just last week, Yahoo announced that 500 million accounts had been hacked.  500 hundred million.

In 2015, Russian based hackers spent two years orchestrating the largest cybercrime ever uncovered. More than $650 million is thought to have gone missing after the gang used computer viruses to infect networks in more than 100 financial institutions worldwide.

If you want to understand the threat posed by cyber crime, read Mark Bowden’s book “Worm”, about the Conficker worm that infected its first computer in November 2008 and by January 2009, the worm lay hidden in at least eight million computers. The resulting “bot-net” of linked computers it assembled was big enough that an attack might crash the internet. Serious book about a situation that most citizens are unaware of to this day.  Reading the book damaged my long-term confidence in electronic wealth.

An effective way to mitigate this risk of cyber crime, is to make sure that you are still receiving paper account balance statements, on a monthly basis, for all of your financial asset accounts. If anything goes wrong, you will at least have paper proof in your possession to ensure that you are made whole from the electronic loss.  Just imagine trying to prove that you actually did have money in the digital system, when that very system has been wiped clean…

Unprecedented central bank monetary policy. I could write extensively on this concern, but in the interest of brevity, I will try to summarize it.

The global economy has been running on the “jet fuel” of abundant debt for multiple decades.  President Nixon lead the dismantling of the 1944 Bretton-Woods gold standard system in 1971, and the world went full throttle into the fiat monetary system. Fiat currency is money that a government declares to be legal tender, with no backing of commodity or real assets. This is how the global economy has funded the amazing growth over the last 40+ years.

The key was that the central banks, like our Federal Reserve Bank, continued to lower base interest rates in order to stimulate growth and borrowing, which was plowed into spending and investment.

However, we are now at the end of this debt Super-cycle, and the central banks of the world have very little room left to maneuver with the lack of efficacy of zero rates in the USA, and negative rates abroad. So, it is now being proposed that all “cash” could be eliminated in favor of digital currency. Ken Rogoff, a Harvard professor and former Chief Economist at the IMF, just released a book, the “Curse of Cash” which some believe is the “first shot across the bow”.

Why are some concerned? Once corralled into savings accounts and other digital assets, the introduction of negative rates is a direct way to tax savers and seize your wealth. You start with $1,000 in your savings account, and end the year with $995.

Many are in denial and believe this development is unlikely to occur.  However, just look at what was done in Cyprus with their 2013 “bail-in”. Or even consider that your own checking account, which now receives extremely low interest rates, is already deteriorating in value due to the imposition of account fees.

This Central Bank policy risk is very hard to mitigate directly, as the central banks of the world determine monetary policy, and there is no way around their decisions. Right now, there is about $1.25 Trillion of actual hard currency (cash & coins) in circulation (which is only about as large as any major bank’s deposit base). Anyway, if the Fed were to eliminate hard currency, there is nothing you can do to keep it.

However, it would be smart to think through the scenario, and realize that negative rates and the elimination of hard currency probably only occurs when the monetary game is at the end and the risk of deflation and economic depression are imminent. We can be assured that in this position, the global central banks will go “Full Monty” and create enormous amounts of new electronic liquidity (money available) in hopes to counter-attack by causing a spike in inflation and economic growth.

When that happens, you will want to hold tangible assets that will go ballistic in price when the tsunami of new money chases the same amount of assets. Consider diversifying your wealth into tangible assets like a house, land, precious metals, antique cars, wine, boats, art, rental property, cow, goat, etc. If the central bank monetary policy fails (hopefully years from now), their corrective actions will trigger steep inflation, and your real assets will rise significantly in value.

This blog post has taken us down dark roads, which may seem a bit negative. However, I truly believe that awareness and preparation is the best approach. My goal is to help you succeed by providing “real advice based on real life”.

So let me close with a simple summary. Don’t rely 100% on digital currency.


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