Is There ANYWHERE Safe to Put Your Money?

In this episode of Cam Harvey's Through the Noise, host Robert Olinger sits down with finance professor Cam Harvey to examine whether truly safe assets still exist in today's turbulent global economy. With US debt at $39 trillion and geopolitical uncertainty rising, institutional investors are rethinking their allocations. Harvey unpacks the real story behind China's shifting Treasury holdings, explains why gold now exceeds Treasuries on central bank balance sheets, and walks through the eight essential attributes of a reserve currency—revealing why the dollar's dominance remains hard to displace despite mounting challenges. The conversation closes with a provocative look at tokenized gold as an alternative medium of exchange that could provide much-needed discipline against central bank inflation. Essential listening for anyone navigating today's evolving financial landscape.

Transcript

SPEAKER_00 0:00

Welcome back to Cam Harvey's Through the Noise. When I was in the MBA program here, I did a dual concentration in finance. We talked a lot about the risk-free rate based on U.S. Treasuries and this idea that there is this ultimate kind of like safe asset. That I have at least seen in the popular press that that's being challenged a lot more now. So let's just start with a really big philosophical question. Do we have any real safe assets in the world anymore?

SPEAKER_01 0:31

So it's a question of degree. So historically, the Bellweather marquee safe asset is the U.S. 10-year treasury bond. So if there's a crisis, people buy that bond. It bids up the price of the bond, and as a result, the yield falls. And we can see this historically, that the US being the most important economy in the world and the leader in innovation was the safe haven. You go to the U.S. and you buy that Treasury bond. However, again, following history, things change. And given the size of the US debt at$39 trillion, the deficit of$1.9 trillion at a time of economic growth and low unemployment, stock prices high, the geopolitical uncertainty. People thinking, well, maybe we need more than one safe asset. So it's often the case that large institutional investors have what's known as a safe bucket. And that definitely still includes treasury bonds, maybe not as heavily oriented, and often they're inflation-protected bonds, so the uh the tips they're called. But the other components might include real assets like real estate. It might also include commodities. So I do think that we're at the stage, given the leverage of the U.S., this creates risk, people looking at the future path and concluding that they need to diversify.

SPEAKER_00 2:37

And we're I think we're we're seeing that. I saw a chart the other day where our largest holder of U.S. treasuries, I believe, is China, and you see that they're diminishing their holdings quite rapidly of U.S. treasuries.

SPEAKER_01 2:50

Yeah, and I've seen that chart uh also. Uh and we need to be very careful. Uh so politically in China, uh this is something that they're stating, they're reducing their holdings of U.S. uh. treasuries. And this is consistent with a de-risking or a de-dollarization. But if you really dig into the data and you look at other countries that have enormous holdings uh that don't make any sense, like Luxembourg, what's really happening is Luxembourg is holding the Chinese U.S. Treasuries. So if you look at Belgium, Luxembourg, you put that back together, you'll see that the Chinese holdings of treasuries have not really decreased, or if they've decreased, it's a minor amount. But what you do see with this higher quality data is the growth in China's holdings of treasuries. There's no longer growth. It is flattened out or slightly decreased. Again, this is not as dramatic as the graphic on social media, but it does show uh, again, a de-risking.

SPEAKER_00 4:08

Okay. So this there's there's de-risking, but we're not seeing it. We're seeing it in kind of a plateau as opposed to a growth. So um as we come back to kind of like other safe assets, you're talking about real estate, um, other kind of illiquid. Commodities. But what about like we've talked a lot about gold. Is that is that is that where we're seeing gold.

SPEAKER_01 4:30

Gold is a commodity. So uh and and often, as I said, the institutional investors will have an allocation to gold. Um and gold is a special type of commodity, it's more like a currency, it behaves like a currency. Uh, but the commodity um bucket has done like quite well. Think about the weight of oil in that bucket. So recently, in a crisis, often the price of oil uh goes up, and that's good for uh a commodity portfolio. But gold is traditionally perceived as uh a safe haven. There's another graphic uh going around on social media, and this one is is accurate, and what it shows is the foreign holdings of U.S. treasury bonds, the value of that through time, graphed against the holdings of gold. And recently, gold has exceeded the value of the treasury bonds held. So so uh central banks. Is that unusual? Yes. Historically, there's a very large gap. Now we need to be careful uh with this because the the increase in the value of the gold holdings is largely driven by the very substantial price appreciation that has occurred over the last uh couple of years. Indeed, over the last 12 months, the price of gold has gone up by almost 50 percent. So uh so this is contributing, but nevertheless, it is a fact that the value of gold that the central banks hold is greater than the value of the treasuries that they hold.

SPEAKER_00 6:21

But as you as you bring this up, I start to, in my mind, put these graphs next to each other. And uh the narrative that it tells me is that the world is trying to move away from the US dollar. So, you know, is that possible? What would be what would be the replacement? And is it true?

SPEAKER_01 6:37

So this is the idea of a reserve currency. Uh, and indeed, in my research, I've tried to address this idea of uh maybe we don't need a reserve currency in the longer term. But let me kind of go through the qualities of a reserve currency. So, one thing, you might say, well, we want to de-risk, we want to diversify uh away from the US dollar, but what is the next safest currency? So, what is the successor of the US dollar? So we know we move from the British pound to the US dollar as a reserve currency. So, what's the next country? So, could it be China? That's a possibility. So I actually in my research have eight different attributes of a successful reserve currency. And I will try to remember uh the eight, but I want to contrast each feature uh between the US and China. So number one is your economy needs to be large and strong. So check the box for the US and check the box for China. Uh number two, your capital markets need to be very liquid. So it's very easy to trade, and liquidity means you can do a large trade without moving the price uh too much. And you definitely check the box for the US on that. Think of the treasury bond market, the stock market, but it's not so obvious uh for China yet. So they're moving in the right direction, but they're not there yet. Number three, so the currency should be stable, credible, monetary policy, credible, and an independent central bank. So even though there's been questions about the Federal Reserve independence, the Federal Reserve is independent. Okay, so again, US advantage. So the US has got three check marks, um, and China one right now. Number four, rule of law and strong institutions. Czech for the US, never China. Not yet. Uh number five is is kind of a weird one. It's inertia. So uh the idea is you've got the market share as a reserve currency. It's really hard to bump uh like uh the leader off. And uh and this is uh this is a persistence that is important. So again, advantage uh US. Uh number six, you need to be geopolitically powerful. So military power. And I think uh we put a check mark for the US and China. Number seven, and this might be the most important one: free convertibility and lack of capital controls. So we've got a big check mark for the US. US dollar is is essentially a free-floating currency. Chinese currency is not. So so that that is very uh uh negative in terms of being a reserve currency. So any hope uh for China to be a reserve currency, they need to get rid of the capital controls and allow for a free float. And then uh the number eight uh feature again is is kind of interesting, that it's useful to have a current account, think of it as the trade deficit. So there's lots of kind of reserve currency floating around. That's exactly what we have with the US. So you put this all together, and I just don't see a credible alternative in the short term. But that is a menu that I presented. And it is possible that China or some other country could work hard to uh to fix uh some of these uh attributes, to make some changes, make policy changes. But that's not going to happen anytime soon. So I believe that we are uh with the U.S. dollar over the medium term.

SPEAKER_00 11:18

I've been reading a lot of things about how a non-currency can come in and probably do the work of a reserve, of a national reserve currency. Um and I think you have a you have a paper on tokenized gold. Is there any insights like what's the likelihood of of these technologies coming in and displacing?

SPEAKER_01 11:39

Yeah, so this um I guess I'm biased on this because I find it fascinating. Uh, and it's probably the topic of a like a full episode uh that we could do on tokenized uh gold. The idea here is that we were on a gold standard until 1971, where all the currencies were kind of linked to the US dollar. US dollar was exchangeable uh for gold. That was dropped, and we went to a fiat uh regime, and uh all countries are are fiat uh now. So we have not many choices in the US. There is one thing that's legal tender, and that's the US dollar. So what if there was a competitor? And this is the idea of tokenized gold. So it's very much like a stable coin that's linked to a US dollar. So we can use that to pay for things, we can transfer anywhere in the world uh pretty well instantly at very low fees, it's got extreme divisibility, but we could do the same thing for gold. So you could actually have, and this is a provocative idea, that people could literally opt in to a gold-like standard. And this would be an alternative medium of exchange, uh, an alternative store of value, and provide some competition. And you don't need any central bank intervention. This is on its own. So I think it's uh it's a striking idea, and we've seen very substantial growth of this tokenized gold or gold stable coin, it's sometimes called. Uh, and I do believe that it offers something uh new, uh, something that could be useful for many people, and it provides much-needed competition for the central banks uh that have kind of a monopoly over a fiat and are always tempted uh to inflate. Indeed, it is just conventional wisdom that the Fed target for inflation should be 2%. Well, it should be 0%. That 2% is just a tax. So this provides some discipline. But again, uh I look forward to talking in much more detail about this.

SPEAKER_00 14:25

This this this this topic is one that clearly deserves its own episode. I hope we'll talk about it soon. Um but today let's let's close out and thank you so much for the insights once again. You're welcome.