Selling subscriptions to financial investment newsletters is tough. First, the writer needs to be perceived as knowing what he or she is talking about. Second, they also need to scoop other sources on coming out with new information first. Third, they need to discuss subjects that are of direct concern to potential readers.
Like I suspect just about all of you do, I get my share of mail urging me to subscribe to a wide variety of publications, all promising that they will guide me to the financial promised land if I first send them a payment. Some claim to have secret information (and there are a small percentage who legitimately have really good sources). A number proclaim that they accurately predicted a number of market turns in the past. Many of these claims stretch the truth a bit and almost all of them “forget” to mention their forecasts that were duds.
In truth, there is a lot of uncertainty in the world. There is no single financial expert who has a perfect crystal ball seeing into the future. How many of these know-it-alls forecast in advance the March 11, 2011 9.0 magnitude earthquake and following tsunami that struck the east coast of Japan and the global economic impact it had?
Any guru who could be right even 60 percent of the time will, in the long run, be highly successful and attract followers. But, there are even more self-proclaimed experts who are trying to sell newsletters by taking a little bit of truth about coming financial developments and exaggerating how it will impact people’s lives.
In particular, I am more frequently being asked about what people should do to protect themselves against the event that (in the most extreme descriptions) 1) the U.S. government makes it illegal to spend cash, or 2) the U.S. dollar collapses after the Chinese yuan is added as a component of the International Monetary Fund’s Special Drawing Rights. The people asking me these questions all pinpoint the month of October as when these events will occur.
Neither of these extreme developments will happen in October. However, it is possible for newsletter promoters to incorporate enough elements of truth in creating these stories that some people are panicking at the thought that they might occur. Let me try to explain what is really going on so that you can take a balanced perspective on what will be happening.
It is true that there will be two events in October that will impact people’s finances. First, the Payment Networks’ Liability Shift will occur. This involves the Visa, Mastercard, and Europay credit and debit cards. Worldwide, it will affect 1.24 billion payment cards, 15.4 million point of sale terminals, and 360,000 automated teller machines. What is involved is an attempt to eliminate much of about $10 billion in annual fraudulent payment card transactions and to facilitate mobile payment technology.
The means to achieve this transition is with the abandonment of magnetic stripe payment cards and replacing them with cards embedded with a smart chip. The smart chip processes each transaction using a unique set of codes instead of the card number. That way, should someone hack into a computer that has stored payment card numbers, it would be impossible to use that information for subsequent transactions.
The rest of the world is about 75 percent switched over to smart chip-embedded payment cards. Some nations have already banned the usage of magnetic stripe payment cards. The United States, where the greatest number of payment cards, point of sale terminals, and ATMs exist, is the last to switch over. The costs in switching to the new technology could be as much as $9 billion. That is a massive amount, but is actually less than annual payment card fraud losses.
As part of this conversion, every U.S. merchant needs to obtain new payment card processing equipment and software. My own company purchased the needed hardware a few months ago, but we cannot use all of its features until new software is created and installed. Personally, one of my credit card issuers has already sent me a new card with a payment chip, but the others need to do so by October.
There are two other aspects to the reduced use of cash that can make it appear that somehow the United States’ catching up to the rest of the world in payment card processing technology seems to be part of a plot to eliminate the use of cash entirely.
The alleged reason given by some of these sensationalists trying to sell newsletters is that the U.S. government is anti-cash because it allows people financial privacy from the government, and the government wants to eliminate such privacy. It is true that governments are reducing financial privacy. The United States is crippling the ability of its citizens to have accounts outside of the country by subjecting foreign banks and brokerages with expanding onerous regulations of the Foreign Account Tax Compliance Act (FATCA). Other nations, such as France and Italy, are lowering the limit of cash transactions that are exempt from reporting such financial activity to the government.
In America, the Federal Bureau of Investigation and the Department of Justice as part of their “Communities Against Terrorism” program have prepared 25 flyers for businesses to be on the lookout for terrorists (see https://publicintelligence.net/fbi-suspicious-activity-reporting-flyers/). To comply with these guidelines, a few examples of people that merchants are supposed to keep an eye on are those who patronize a business more than once and wear different clothes each time, who support Ron Paul, – and who pay for goods and services with cash.
As technology evolves, the need for cash is declining. Today people use cell phones instead of throwing coins in pay phones. In a growing number of cities, parking meters accept payment cards instead of coins. Today, there are also more vending machines that require payment cards instead of bills or coins.
In sum, even though the United States and other governments are discouraging financial privacy through the use of cash payments and technology is displacing the need for currency and coins, there is no full-blown effort to totally eliminate financial privacy by prohibiting the use of cash payments in October.
On the other subject, earlier this year the Chinese government announced that it wanted the Chinese yuan to be added to the other four currencies (the U.S. dollar, Japan yen, British pound and the euro) that are components of the International Monetary Fund’s Special Drawing Rights (SDR) when modifications could be considered at a meeting in October. This request reflects the rise in the use of the yuan in international transactions and the growth in the Chinese economy. There are two requirements to be considered for inclusion in the SDR. First, at least 60 percent of the IMF’s member nations must agree, which has already been achieved, and at least 85 percent of the IMF’s voting power has to support this change. The United States holds 16 percent of the IMF’s voting power, which means it has the capability to veto this change. Should the U.S. government support China’s request, then China will have surpassed the support threshold for this requirement.
The U.S. dollar currently makes up more than 40 percent of the value of the SDR, and is the largest component. It is obvious that adding the Chinese yuan to the SDR will reduce the dollar’s share of the value of the SDR. If the yuan is added to the SDR, the U.S. dollar will be perceived as somewhat less important in international commerce. The result of such a shift would be 1) that some U.S. currency and government debt now held in foreign hands would be repatriated, forcing the government to pay a higher interest rate to place its debt with other parties, and 2) that the value of the U.S. dollar against other major currencies could decline further.
Decades ago, the U.S. dollar was used for payment in more than 90 percent of all international transactions. As the rest of the world has grown economically faster than America, that percentage has declined, now down to about 60 percent. The trend is clear for the dollar to be used in a lesser percentage of international payments over time. This decline is being somewhat accelerated by China’s aggressive campaign to promote the international use of the yuan. However, the yuan still accounts for less than 3 percent of international payments.
Even if the use of the yuan in international payments were to double in the next three months, that would have a barely noticeable impact on the foreign demand for U.S. dollars. The use of the dollar in worldwide commerce is so pervasive that it will take far longer for it to be significantly displaced. In other words, while the U.S. dollar will continue to diminish in global importance over the coming decades, it will not crash or even fall sharply in value in October 2015.
There are plenty of rational reasons to own physical precious metals as insurance against the risk of decline in the values of paper assets such as stocks, bonds and currencies. Rushing out to buy some because of the prospect of it becoming illegal to hold cash or that the U.S. dollar could fall sharply or fail in October are not on that list of reasons.
Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).