Welcome to our Friday mailbag edition!
Every week, we receive great questions from readers. And every Friday, I answer as many as I can.
Our question today is about the rise of digital payment systems.
Regular readers know I’ve been following this story here and in our premium services.
We have written that it’s only a matter of time, perhaps a few years, before digital platforms and central bank digital currencies (CBDCs) become the norm for payments in the U.S. and worldwide.
The number of countries developing digital payment systems and CBDCs is growing.
There are now 134 countries, representing 98% of global GDP, in some phase of CBDC development. In May 2020, that number was only 35.
Plus, 68 countries are in the advanced exploration phase – development, pilot, or launch.
Of these, 19 of the G20 countries are in advanced stages of CBDC development. Three countries – the Bahamas, Jamaica, and Nigeria – have fully launched CBDCs.
In addition, there are 36 CBDC pilot programs. That includes one for the digital euro.
Other nations in the pilot stage include Brazil, Japan, India, Australia, South Korea, South Africa, Russia, and Turkey.
So you can see it’s a global trend. And that brings me to this practical question we’ve received from readers…
I travel abroad. Will a cup of coffee be the same price in CBDCs around the world?
First of all, thank you so much for that question. I’m an avid traveler myself. There’s no better way to understand the world than to get out there and explore it.
To answer that question, let’s talk about the Big Mac Index.
The Economist developed it back in 1986 to show the cost of a Big Mac burger in different countries. In economics wonk speak, that’s called “purchasing power parity.”
I remember it from my days living in London as a senior managing director at Bear Stearns. I ran the analytics group there, and we traveled to meet with central banks, pension funds, and banks around the world.
During one year in the mid-1990s, I traveled to 12 countries in Europe, eight in Asia, and a couple in the Middle East. Talk about air miles!
I didn’t buy Big Macs in any of them (I’m a vegetarian). But the index was a topic of conversation at the office for my team.
You can still find it today. Take a look…
A Big Mac in the U.S. costs $5.69. In dollar terms, it’s most expensive in Switzerland, where it costs $8.17. And it’s cheapest in Taiwan, where it costs $2.39.
In other words, the price for a Big Mac in dollar terms is different around the world, even though it’s the same item.
That’s because of domestic economic differences. Like what your original currency of exchange was… And the cost of getting or producing that item in each country.
In theory, if the dollar is strong relative to other currencies, you can buy more Big Macs in another country for the same price than you can in the U.S.
But there are other costs to consider. Like transportation costs for getting raw materials and commodities from one country to another.
Some countries are net exporters, and some are net importers of certain materials. Some are developed, and some are developing.
In short, all of these economic factors contribute to how much any currency can buy at home or abroad.
And all of this backdrop will apply to CBDCs, like it applies to non-digital currencies today.
That means your cup of coffee will cost a different amount in other countries, just as it does today, once we convert to a CBDC-based world.
As we’ve written, most of the world is in different degrees of analyzing or reaching the ability to launch a digital currency in their nation.
And we discussed how these would eventually replace current “cash” or non-digital versions of their currencies. This process will likely unfold over several years. It will happen more quickly in some countries than others.
But overall, your money in the form of a U.S.-based CBDC will have a roughly similar purchasing power relative to other countries’ CBDCs as it has now.
I hope that helps. And thanks to everyone who wrote in! If you have any other questions, write me at [email protected].
I’ll do my best to address them in a future Friday mailbag edition. Just remember, I can’t give personal investment advice.
In the meantime, happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins