Video – 2022 Focus: Expanding the Opportunity Set

2022 Focus: Expanding the Opportunity Set

With inflationary risks and less accommodative policies likely to increase volatility, PIMCO Group CIO Dan Ivascyn offers strategies that may hedge inflation, broaden the opportunity set and potentially earn stronger returns from more complex areas of the market.

Watch the 8 minute video here.
Source: PIMCO
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Podcast: Catch 2022: What’s in store for the year ahead

Chief investment officers and economists assess the policy dilemmas and big investment themes of 2022.

In this 54 minutes podcast by Fidelity, Richard Edgar is joined by Steve Ellis, Global Chief Investment Officer for Fixed Income, Romain Boscher, Global Chief Investment Officer for Equities, Anna Stupnytska, Chief Economist, with additional contributions from Neil Cable, Head of European Real Estate investing.

Listen to the podcast here.

If you have questions and would like your financial situation to be evaluated, please email us on with your contacts, for an exploratory meeting, at our cost, not yours.

Source Fidelity –

Fidelity’s CEO and CIO discuss the outlook for 2022

Fidelity International’s CEO Anne Richards and CIO Andrew McCaffery discuss the ‘Catch-2022’ policy paradox and the fifth industrial revolution arising from the need to get to net zero emissions. Hosted by Richard Edgar, Editor in Chief.

Watch the 9 minute video here.

If you have questions and would like your financial situation to be evaluated, please email us on with your contacts, for an exploratory meeting, at our cost, not yours.

Video source – Fidelity

2020-21 financial year in review

2020-21 was a remarkable year of economic and market recovery, but COVID-19 risks remain

Despite the ongoing threat of COVID-19, massive fiscal and monetary support measures were successful in engineering an extraordinary global economic recovery. Share markets recorded very strong gains in response, offsetting the large losses in the March quarter 2020 when COVID-19 first spread across the world. Confidence that the recovery in economic activity and corporate earnings can be sustained received a significant boost in November 2020 when the successful development of a number of vaccines were announced. Markets are hoping that rising vaccination rates will reduce the necessity for disruptive social and business activity restrictions.
However, vaccination progress varies across countries and the emergence of COVID- 19 variants such as the highly infectious Delta strain means that the world has a long way to go before returning to ‘normal’.

The global economy staged a remarkable recovery despite the presence of COVID-19

The economic recovery has been ‘multi-speed’ with the US and China rebounding strongly while Europe and Japan have lagged in comparison, due principally to social mobility restrictions to halt the spread of the virus.

Thanks to the powerful combination of monetary and fiscal support by the US Federal Reserve (the Fed) and the US government, the US economy recovered strongly from the disastrous decline in the June quarter 2020. The economy grew at an annual rate of 6.4% in the March quarter 2021. The recovery that was evident by the end of the 2020 calendar year was reinforced by the massive spending agenda of newly elected President Biden. Two stimulus packages were announced in the first 100 days of his Presidency. The US$1.9 trillion American Rescue Package which passed through Congress in March provided US$1,400 individual payments to all Americans (following December’s $600 payment) plus a range of handouts including an extension of support for the jobless until August. President Biden also proposed a US$2 trillion infrastructure spending plan though this was scaled back to
$973 billion to help its passage through Congress. As the economy improved, the unemployment rate fell from a high of 14.8% in May 2020 to 5.8% by May 2021, although this remains well above the pre-pandemic 3.5% in February 2020. According to US payrolls data, there are still 7.6 million fewer jobs than in February 2020.

China’s economy rebounded strongly following the sharp contraction early in 2020. China’s assertive stimulus measures helped the economy grow by 18.3% in the March quarter although this is measured from a low base a year ago. Signs that China’s economic activity was moderating emerged later in the year as stimulus measures were wound back or removed.

In Europe, the implementation of activity restrictions including curfews across the continent late in 2020 in response to high rates of infections slowed the eurozone’s recovery. The 0.7% decline in the December quarter’s gross domestic product (GDP), followed by a 0.6% contraction in the March quarter, represents the eurozone’s second technical recession in 12 months.

The UK economy experienced similar challenges as COVID-19 infections were high for much of the year. UK GDP has yet to return to pre-COVID levels. However, the UK has implemented its vaccination programme with great success, allowing for restrictions to ease. Barring the spread of the new more infectious COVID-19 variants, the Bank of England expects the economy will recover strongly in the remainder of 2021.

Japan’s economic recovery has also lagged other developed economies as it has been forced to contend with waves of virus infections and a comparatively low population vaccination rate. In April, a third state of emergency was reintroduced covering Tokyo, Osaka and two prefectures to combat the latest outbreak of infections. This has entrenched divergent performances within the economy with exports surging from last year’s lows as a result of the global economic recovery while domestic based industries such as retail continue to struggle. Japan faces the added pressure of hosting the Olympic Games commencing on 23 July following their postponement last year.

Australia’s economy also staged a remarkable turnaround, although at considerable cost as the Federal Budget deficit forecast of $161 billion is the highest for decades. However, the deficit is below earlier forecasts, thanks to a better than expected economic recovery and the 108% rise in the price of iron ore which is Australia’s largest export.

After contracting -7.0% in the June quarter 2020, Australia’s GDP expanded by 3.4% in the September quarter, 3.1% in the December quarter and a further 1.8% in the March quarter. While the rate of recovery has moderated, the economy still grew 1.1% in the year to 31 March to be above pre-pandemic levels. This is an impressive result, especially as the state of Victoria was forced to implement stage 4 restrictions in early August for an extended period due to a spike in COVID-19 infections. The tapering of some government support measures also created challenging circumstances for some households and businesses.

Signs of Australia’s recovery were widespread although some sectors remain constrained as a result of COVID-19. The revival in the jobs market and hours worked saw the number of people employed recover to pre-pandemic levels by March 2021 and the unemployment rate fall from a high of 7.5% in mid-2020 to 5.1% in May 2021. Record low interest rates contributed to a 40% rise in housing construction approvals and prices for dwellings increased across the country. The 5.4% March quarter rise in residential property prices was the strongest quarterly growth since the December quarter 2009. Consumer spending has rebounded strongly while recent business and consumer sentiment surveys suggest that Australia’s economic recovery still has considerable momentum, barring a serious rise in infections.

Out with deflation, in with inflation

One of the unexpected consequences of the global pandemic and the economic recovery that began in the middle of 2020 has been the emergence of inflation pressures.

The higher inflation readings were accentuated by the ‘base effect’ as current prices for goods and services are measured against prices a year ago that were generally lower due to the pandemic-induced collapse in demand. The substantial economic recovery following the rollout of massive fiscal and monetary support measures caused demand to rebound, outpacing the supply of many goods and services. This was especially the case for manufactured goods as the closure of factories early in the pandemic, firstly in China followed by the rest of the world, created supply shortages at a time of rising demand. The pandemic also changed demand patterns with stay-at-home workers shifting their consumption to goods at the expense of services.

Supply chain and transportation disruptions also contributed to price inflation. Sea and air freight capacity fell due to shortages of containers and fewer flights, resulting in higher container and freight costs. Aside from the impact of supply bottlenecks and disruptions, prices for some commodities were pushed higher by investors seeking inflation hedges. In the year to 30 June, the London Metal Exchange price of copper was up 55.4% while the price of silver increased 44%.

Evidence of reflation was widespread although not all economies experienced inflation pressures to the same degree. Canada’s 3.6% inflation rate for the year to the end of May was the highest for a decade. Britain’s 2.1% inflation in the year to May 2021 was above the Bank of England’s 2.0% target for the first time in two years while in the US annual headline inflation reached 5.0%, the highest it has been since August 2008. Eurozone inflation increased to 1.6% in April and there are expectations that it could continue rising and exceed the European Central Bank’s (ECB) 2% target as the economy continues to recover in the second half of 2021.

In contrast, deflationary conditions persist in Japan with the -0.1% year on year decline in consumer prices the eighth consecutive month of falling prices. At 1.1% for the year to 31 March, Australia’s inflation pressures remained subdued and well below the Reserve Bank of Australia’s (RBA) 2-3% target band. However, as in Europe and other parts of the world, the RBA expects inflation to rise temporarily as the economy continues to recover. It’s in the US where a sustained pick-up in inflation is more likely as massive spending by the government and ultra-low interest rates could result in a further substantial economic expansion.

Despite the widespread evidence of higher inflation and potential for further rises in the second half of 2021, most central banks have avoided changing interest rate policies. This is because they expect price pressures to be “transitory” and eventually recede as supply side disruptions abate. In Australia, the RBA’s guidance is that interest rates are on hold until 2024. In the eurozone, the ECB is keeping its policy settings and bond purchasing program steady despite upgrading growth and inflation forecasts for the second half of 2021. The Bank of England maintained the Bank Rate at 0.1% and continued with its supportive bond purchase program as it expects any move in inflation above its 2% inflation target to be temporary. However, the US Fed sent the first signal in June that the era of low interest rates will eventually come to a close while also maintaining the view that recent inflation pressures will transition lower to its target range.

Global share markets produced great returns

After enduring sharp and substantial market falls in the March quarter 2020, share investors have enjoyed a remarkable rebound. For the year to 30 June, global shares returned 35.3% on an Australian dollar hedged basis. This was higher than the 27.7 % return for global shares on an unhedged basis as the Australian dollar appreciated in value against some major currencies.

As they are inherently forward looking, share markets chose to look beyond the immediate social and economic dislocation caused by the global spread of COVID-19 and instead focussed on prospects for economic and corporate earnings recovery. These expectations weren’t misplaced as supportive stimulus measures implemented by governments and central banks led to encouraging signs of economic recovery by the September quarter 2020. Market confidence in the longevity of the recovery received a significant boost in November when Pfizer, Moderna and AstraZeneca confirmed they had developed vaccines with encouraging trial results.

Most major share markets closed out the financial year with positive returns. The US share market was by far the best developed market performer, rising by 40.1% (in local currency terms). Aside from the positive response to the vaccine rollout, strong economic data and exuberant forecasts for US corporate profit results underpinned the market’s spectacular rise. Investors were also encouraged by expectations that the new Democrat President Biden would implement more fiscal stimulus measures while also struggling to get the planned 7% corporate tax rise through the Republican controlled US Senate. The US market had been narrowly led prior to the vaccine announcements in November with technology and online shopping giants such as Facebook, Apple, Microsoft, Google and Amazon accounting for much of the market’s rise. However, the focus of investors broadened after the vaccine announcements to include sectors and companies more exposed to the improving economic cycle.

The performance of European markets strengthened throughout the year due to the gradual relaxation of lockdown restrictions, good progress with vaccinations, improving economic conditions globally and the ECB’s commitment to keeping interest rates low, all of which underpinned confidence that Europe’s economy would recover strongly through the remainder of the 2021 calendar year. Germany’s DAX Index increased by 26.2% and the French CAC Index rose by 35.5%. Despite the dire economic consequences of COVID-19 in the UK in the December half and a worrying escalation in the rate of infections late in the year, the UK’s FT 100 Index still managed to rise by 18.0% over the year. China’s strong recovery helped the MSCI China Index to increase by 16.8%, which also contributed to the 29.2% (unhedged) return of the MSCI Emerging Markets Index. Elsewhere in Asia, Japan’s Nikkei Index gained 31.3% as the global economic recovery benefitted its manufacturing exporters.

Our share market also performed strongly

Australia’s share market also performed well with the ASX200 Accumulation Index returning 27.8% in the year to 30 June. This was our market’s highest financial year return for more than three decades. As in other parts of the world, supportive fiscal measures by the Federal and state governments and initiatives by the RBA that included reducing the cash rate to a historic low of 0.1% were successful in restarting the economy. Corporate profits improved with some companies, particularly the large banks, increasing dividends and payout ratios.

As numerous lockdowns across Australia during the year forced people to spend more time at home and prevented travel, the industry sector that produced the best return was Consumer Discretionary with an increase of 46.1%. Companies such as Wesfarmers, JB Hi-Fi and Harvey Norman experienced significant demand growth as people spending more time from home undertook maintenance and put in place work-from-home office infrastructure. Information Technology increased 39.8%, emulating in part the performance strength of the US technology companies as well as strong price performance by AfterPay.

The Materials index was another strong performer. The 34.5% rise was due largely to ideal market circumstances for the iron ore miners BHP, Rio Tinto and Fortescue Metals Group as strong Chinese demand and constrained Brazilian supply pushed the iron ore price upwards by 108.4%. This led to higher earnings and dividends for shareholders.

Of greater significance to the market and a key contributor to its financial year return was the revival in performance of the four large banks – Commonwealth Bank, ANZ, National Australia Bank and Westpac – which collectively account for approximately 18% of the ASX200 index value. The Financials ex A-REIT index increased 40.6% in the year. After suffering sharply lower profits last year which resulted in markedly lower dividends, the banks have been significant beneficiaries of the economic recovery in Australia and New Zealand. Bank share prices rebounded as investors grew confident that the economic recovery would result in lower loan deferrals and bad debts and revive credit growth. Commonwealth Bank reached an all-time high of over $100 per share during the year. The strength of the Australian residential property market and high demand for housing finance also benefitted the banks. The most recent half year profits were above the previous half year results and dividends were also higher. While limitations imposed by the prudential regulator APRA on banks’ dividend payout were removed late in 2020, bank payout ratios (dividends paid as a % of earnings) remain below pre-COVID levels.

Fixed income markets also recovered

The recovery in the global economy was reflected in varying ways across the fixed income landscape. While plentiful government and central bank support provided a strong tailwind to most credit assets, this also gave rise to higher inflation expectations, which hurt the performance of long duration fixed income securities.

By July last year, financial markets were already firmly in recovery mode, thanks to the extraordinary levels of fiscal and monetary support. While this was effective at providing liquidity and preventing the cascading wave of defaults and distress that many investors had feared, it was the combination of the US election results (and associated promises of further massive stimulus) and the approval of several vaccines that led to real confidence in a strong rebound from the pandemic. This was reflected in a rapid rise in government bond yields in February and March this year, as investors sought higher-returning opportunities elsewhere. Rising inflation expectations were another driver of rising bond yields, due to a combination of stronger than expected consumer demand, supply chain disruptions, promises of continuing plentiful fiscal stimulus, and central banks committing to letting inflation run somewhat higher than target until the economy has fully recovered.

In the US, 10-year government bond yields rose from 0.9% at the beginning of the year to 1.7% at the end of March, a sell-off that led to one of the worst quarters of performance for bonds in the last 30 years. It was similar in Australia, with the 10-year bond yield rising from 1.0% to 1.8% over the quarter, and there were even signs of life in Germany with the 10-year bond yield rising from- 0.6% to -0.3%. The last three months of the financial year saw some reversion, as the US Fed in particular showed signs they might respond to inflation pressures by hiking cash rates earlier than expected, thus reducing the chances of an inflation break-out over the longer term.

In credit markets, the support provided by policy makers allowed companies to raise record levels of debt as they sought to build a buffer to see them through the COVID-19 crisis. However, the cost of that borrowing has been extremely low, and at the same time earnings have been stronger than feared, meaning companies are generally well capitalised and unlikely to face financial difficulties over the next year or two. Default rates over the past 12 months were much lower than expected this time last year, and looking forward, default expectations even among the lowest-rated companies are lower than they have been for many years. This has been reflected in pricing, with credit spreads compressing to post-GFC lows across most sectors of the credit markets, delivering strong outperformance for credit relative to government bonds.

In terms of index performance, global government bonds delivered -1.4% over the year to 30 June, with investment grade corporate bonds higher at 2.7% over the year in Australian dollar (hedged) terms. Australian bonds (-0.8%) slightly underperformed global bonds (-0.2% hedged). High yield bonds performed strongly to deliver 10.0% (hedged) for the year to 30 June, outperforming floating rate bank loans (9.4%). Australian inflation-linked bonds returned 4.3%, well ahead of nominal bonds, benefitting from higher than expected inflation and rising inflation expectations.

Geopolitical issues were prominent as the year progressed

The US Presidential election in November was a major focus for markets. The strong performance of the US economy at the beginning of the year was expected to favour the incumbent President Trump. However, the economic damage caused by COVID- 19 and the indifferent and inadequate response by the Trump administration to the worsening health crisis enabled the Democratic nominee Joe Biden to win the Presidency. Predictions the Democrats would easily win majorities in both the House of Representatives and Senate proved to be wide of the mark. The Democrats held the House but with a smaller majority while the Democrats secured the balance of power in the Senate (early in 2021) after winning two run-off elections in the state of Georgia. The incoming Vice-President Kamala Harris will have the casting vote in the Senate as both the Democrats and Republicans have 50 seats each for the next two years.

The Brexit saga continued through the year. After securing parliamentary agreement early in 2020 for the withdrawal, the terms of Britain’s exit from the European Union was finally agreed between Brussels and London and ratified just days before the 31 December deadline.

A concerning development was the deteriorating diplomatic and trade relationship with China, our largest trading partner and destination for approximately a third of Australia’s total exports. A number of issues over an extended period have contributed to the growing tension, including banning Huawei from tendering for the 5G mobile network, introducing “foreign interference laws” on national security grounds, Australia speaking out on the South China Sea and human rights issues in China and the call for an inquiry into the origins of the coronavirus pandemic. China imposed high tariffs or import restrictions on a range of Australian agricultural and food exports such as barley, beef and wine and also coal. Exports of iron ore to China have not been affected so far as it is a commodity that is crucial to China’s ongoing infrastructure development and supply from Brazil remains restricted. Should this change, the impact on Australia’s economy, government revenue, share market and currency would be great.

This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

If you have questions and would like your financial situation to be evaluated, please email us on with your contacts, for an exploratory meeting, at our cost, not yours.

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The history of money and where it is headed.

Around 600 BC, the Chinese were among the first to invent money when they used coins worth the metal within to overcome the hassle of bartering. Around the first century AD, the Chinese invented paper and in the following centuries devised printing presses. These inventions plus the heaviness of coins – the standard unit was 1,000 bronze coins on a string and weighing at least three kilos, even heavier in Sichuan where only iron was in abundance – fostered the next monetary innovation. In 995, a merchant in the Sichuan capital of Chengdu let people leave their coins with him. In return, he gave them standardised receipts for reclaiming the coins. People used the receipts as a means of exchange and paper money backed by assets was born. Other merchants copied the idea. So did counterfeiters. China’s government took control of printing money to ensure it was trusted.

The next innovation came after 1250. Genghis Khan’s grandson Kublai introduced an ‘inaugural treasure exchange voucher’ redeemable for silver or bronze for mandatory use throughout the world’s then-biggest empire. In 1287, Kublai, low on treasure after two failed invasions of Japan, issued paper notes backed by nothing. And the Chinese trusted the world’s first fiat currency, as Italian explorer Marco Polo reported.

Europe hosted the next advance in money. In the 1600s, UK goldsmiths, having long issued receipts Chinese-style for people’s coins, started to lend people receipts on the proviso that the sum was repaid with interest. Thus was born fractional-reserve banking whereby banks create money. This banking system persists to this day, as does the risk of fatal runs on banks should too many depositors seek their money at once.

The most recent monetary innovation is the rise of cryptocurrencies after Bitcoin appeared in 2009. The ability to pay over the internet by computer code (rather than moving money electronically in bank-to-bank wire transfers) has prompted governments to investigate what would be the next leap in money. They are thinking of issuing digital national currencies.

The Bank of International Settlements says that close to 60 central banks are studying how app-based money could co-exist with cash, a piece of paper that is a claim on the government, and bank deposits, a traceable claim on the bank.Sweden’s Riksbank is the western central bank most advanced in testing e-money, a paperless form of cash on a digital ledger held by the central bank. The Riksbank this year released inconclusive results from a pilot project and postponed any e-krona launch until at least 2026. The result typified how western governments have seen e-currencies as a niche quest of no urgency.

The apathy, however, vanished in March when China unexpectedly became the first major country to unveil a digital national currency.(The Bahamas launched a digital ‘Sand Dollar’ in 2020 though others say Finland’s failed chip-based Avant Card of 1992 was the first central-bank digital money.) Beijing’s motivations for trialling an e-yuan in selected cities include reining in the country’s payments companies and gaining even more control and visibility of transactions for political-control purposes. Another incentive is to create a yuan-based international payments system, to escape the reach of the US-controlled financial system and help the yuan approach the US dollar’s reserve status.

In response to China’s efforts, the eurozone, UK, the US and elsewhereare intensifying research into ‘govcoins’. Apart from catching up to China, they see that a cyber currency would allow for instant payments, lower transaction costs and better crime detection, and help government budgets by boosting ‘seigniorage profits’ – an issuer’s profit from the nominal value of money exceeding the cost of creation (almost nil). Online accounts with central banks would help authorities reach the unbanked, micro-target fiscal stimulus, impose negative interest rates, spur innovation and enable ‘programmable money’. Digital money, as well, would give non-banks greater access to the central-bank balance sheets and instant settlement systems, check the data-gathering of payments companies and counter the use of unsafe private cryptocurrencies or foreign digital national money.

But don’t expect the mass use of an e-dollar or e-pound soon. While cash makes for untraceable transactions, e-money is traceable and thus raises privacy concerns. Hurdles include cyber-security risks and how to enable offline use and the threat to payments companies. The core drawback of central-bank money under capitalist systems, however, is the soundness of such money. The (implicit) government guarantee undermines a financial system based on private banks and fractional-reserve lending. That people would prefer to hold e-money deposits at the central bank means private banks might struggle to attract and retain deposits. The trust mismatch would boost the risk of bank runs. Commercial banks might be forced to turn to costlier and unstable sources of funding. One solution would be to shift to full-reserve banking but that would be another experiment. Another would be to limit the amount of govcoin that could be issued but that curbs its benefits.

An e-yuan is bound to inspire greater use of China’s currency outside China and help a country with a state banking system (where lending is based on collateral) insulate itself from US sanctions. But, as ‘hot money’ flows could boost the yuan and make exports uncompetitive, Beijing is wary of the yuan approaching the US dollar’s pre-eminence. While e-money will appear in coming years, central-bank money is likely to remain peripheral while its mass use comes with systemic threats.

It must be stressed that state e-money would be little like stateless cryptocurrencies (or ‘stable coins’, ones that are backed by financial assets such as Facebook’s proposed Diem). Private cryptos are easy-to-outlaw, peer-to-peer code that are an inconvenient means of payment. Unlike speculation-prone cryptos, government e-money would trade in line with the physical currency. So what if China launches an eCNY in 2022. Chinese multinationals would still rely on the US-dollar-based financial system and an e-yuan’s arrival wouldn’t do much to overcome how China’s currency manipulation, closed capital account and limited capital markets retard the currency’s ascent to proper reserve status. Beijing would be wary of issuing too much (government-guaranteed) eCNY so as not to undermine the deposit-taking of commercial banks.

The foreseeable future of central-bank money harks of one where, done prudently, government e-money, especially the Chinese version, will be a catalyst for some change but not enough to match the hype.

Not yet reserved

From 1979 to 1994, China banned visitors from using the yuan and forced them to transact in foreign-exchange certificates that were accepted only in tourist spots. The political aim of this two-track currency system was to prevent foreigners wandering about China. The economic motive was to prevent the yuan’s conversion into other currencies. How times change. For some years now, Beijing has campaigned to make the yuan a reserve currency like major western currencies, which are widely used around the world as a store of value.

Just as China’s forex certificates had a political and an economic purpose, so too does China’s pursuit to make the yuan a reserve currency. Politically, a reserve currency would grant China more global power. Economically, reserve status would lower trade and financing costs for Chinese companies. To the benefit of Chinese savers, a yuan of reserve standing would promote the development of financial markets and risk-management instruments. The feat would encourage better macroeconomic management of China’s economy because policymakers would need to consider how foreign investors might react to decisions.

Beijing’s biggest success in its quest for yuan reserve status occurred in 2016. That year, the IMF deemed the yuan “freely usable” – even though it’s not – and included the currency that features portraits of Mao Zedong in its special drawing rights. This is the term for a basket of reserve currencies that includes the US dollar, euro, yen and sterling that IMF members can access in emergencies.

But apart from the IMF push, the yuan has fallen well short of attaining genuine reserve status. China has only ‘internationalised’ the currency since it was first used to settle trading on Hong Kong’s border in 2009. This term means that people outside China accept payment in yuan, the proper name of which is the renminbi or ‘the people’s currency’. (The yuan is the biggest unit of account, like pound is for sterling.) In January this year, cross-border payments in yuan reached a five-year high of 2.4% of global transactions compared with 38% in US dollars. The US dollar’s dominance is similar in forex markets, trade finance and among official reserves.

To attain a reserve glow akin to the US dollar’s, the yuan needs to be market set, China’s capital account needs to be fully opened and China’s capital markets deepened and widened. The problem is that these goals clash with China’s illiberal political system. Dictatorships favour stability. Beijing is thus reluctant to open its capital account so much that its interest rates and currency – and hence its economy – are vulnerable to movements of capital under the control of foreigners.

China’s promotion of an e-yuan can be viewed in the context that China is the only major world economy to lack a haven currency, a drawback that leaves the country vulnerable to US sanctions and at a disadvantage in attracting capital. The e-yuan’s mission is to help create a parallel yuan-based international payments system that overcomes these problems. Beijing wants the digital money to be used by countries in Africa, Asia Pacific and Latin America that are part of its Belt and Road Initiative and expects it to appeal to allies such as Iran, North Korea and Russia that too are vulnerable to US financial sanctions. Being first might allow China to gain the ‘first-mover advantage’ in setting global standards for digital currencies. But there is no network effect to attain because other countries have their currencies.

As Washington’s deteriorating finances cast doubt on the US dollar’s long-term value (as shown by how the US dollar’s share of global forex reserves has dropped to a 25-year low of 59%), China is bound to improve the yuan’s use in global trade and finance. But genuine reserve status and immunity to US sanctions are chimeras while China is a semi-closed economy, even if tourists can use the yuan nowadays.

A fraction-less world?

In 2018, the Swiss government was forced to hold a referendum (or ‘federal popular initiative’) on the ‘Sovereign Money Initiative’ that, by neutering the ability of banks to create money, sought to prevent another financial crisis. The proposal decreed that only the central Swiss National Bank should have the authority to create money. By calling for ‘full-reserve’ banking, the initiative sought to end five centuries of private banks creating money when they lend amounts not fully backed by assets.

As 76% of Swiss voted against the proposal, fractional-reserve banking survived in Switzerland, as it has elsewhere. During the Great Depression, for example, famous economists in the US including Irwin Fisher called for bank loans to be fully backed by deposits, as did Milton Friedman in the 1970s.Such critics saw fractional-reserve banking as the source of instability in capitalist financial systems because it comes with the spectre of bank runs. And they happen – the IMF in 2008 identified 124 bank runs (or “systemic banking crises”) from 1970 to 2007.

A financial system based on private banks and fractional-reserve banking is inherently unstable because it cannot cope when too many depositors want their money at the same time. To limit the risk that bank runs might crash the financial system, governments create safeguards around banks.

In a world of full-reserve banking, private banks as we know them might disappear. Bank-lites might accept deposits but the volume of loans would be restricted to the amount of deposits. In the absence of the lending (money creation) that is the lifeblood of capitalism, the system would operate almost as did the Soviet banking system under its only bank, Gosbank.

This is a likely prospect of life under govcoins unless people devise a system whereby retail deposits at private banks are regarded as secure as those held at central banks. As people need only log on to switch their money from a private to a central bank (rather than line up at a bank), giving people the option of e-deposits at the central bank would probably risk such bigger and quicker bank panics that a digital national currency could never be made available for unlimited mass use.

The US government (and Microsoft and others) first tested using e-money in the 1990s when it investigated the thoughts of US computer scientist David Chaum. He foresaw that the disappearance of cash would lead to a world of traceable transactions and devised a digital money that would be harder to track. Chaum’s paper of 1985, ‘Security without identification. Card computers to make Big Brother obsolete,’ inspired the crypto-anarchist Tim May to form the cypherpunks who sought to write the code to enable digital money. UK professor Adam Back then devised the computation called a ‘hash’ that became the ‘hashcash’ that prevents computers creating infinite amounts of money. The next advance was when US coder and cypherpunk Wei Dai invented public ledgers that gave digital money its anonymity.These developments helped whomever used the pseudonym Satoshi Nakamoto to invent Bitcoin.

Central bankers, however, have no radical anarchistic bent. These ‘first do no harm’ types might take a while to formulate central-bank money that doesn’t threaten fractional-reserve banking. That might mean limiting the amount of money individuals can hold in central-bank e-accounts to a few thousand dollars. It might mean e-currency could be held in mandated banking institutions rather than with central banks. It could mean making explicit the lender-of-last-resort benefit that central banks offer private banks. Or it could mean that central banks will deposit the e-currency it issues with the banking system or create facilities where central banks compensate banks for the loss of deposits during a crisis . Or policymakers could allow the banking sector to shrink in favour of a shift towards lending via capital markets or by super funds.

These suggestions, however, come with problems that beg the question: Why bother with the experiment of e-money? The reality is that in the 500 years of fractional-reserve banking, no one has devised a better money-creating system for driving economic growth that is immune to panic.

While official e-money will appear at some minimum level and have its uses, especially for China’s global aspirations and perhaps widening the types of institutions that have access to central banks to improve wholesale markets and international transactions, govcoins are unlikely make redundant 2,600-year-old cash and other traditional money.

If you have questions and would like your financial situation to be evaluated, please email us on with your contacts, for an exploratory meeting, at our cost, not yours.

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2021 Federal Budget insights and analysis

On Tuesday 11 May 2021, the Australian Government handed down its Federal Budget.

To understand what the Budget proposals mean – and how they might affect you personally, please find attached some resources prepared by MLC:

If you have any concerns, or would like to discuss your financial strategy, please feel free to arrange an appointment by contacting Dev at