Bob’s Journal 9/18

How Stablecoins Are Likely to Affect the Dollar, Interest Rates and More

The GENIUS Act, signed into law in July, could have far-reaching effects on U.S. interest rates, the value of the dollar and other aspects of the economy.

A stablecoin is a digital currency that is fully backed by one or more types of assets. Because of the asset-backing, the value of the currency is supposed to be stable, or at least fluctuate considerably less than the values of digital currencies that aren’t backed by assets.

The GENIUS Act primarily ensures that stablecoins available in the United States will be fully backed by solid assets. The issuers also must publish audited reports and meet other requirements.

Most stablecoins peg their values to the U.S. dollar, so U.S. Treasury debt is the primary asset the issuers use to support the stablecoins.

The flow of money into stablecoins has increased. Issuers and third parties report that circulation of stablecoins in the second quarter of 2025 was up to 90% higher than a year earlier. The major issuers of stablecoins (Circle and Tether) report significant increases in the use of their stablecoins.

Increased issuance of stablecoins means the sponsors are buying more treasury debt. The growth of stablecoins is a new source of demand for federal government debt and a new way to finance the deficits.

Secondary effects are that interest rates are likely to be lower and the dollar is likely to be stronger than would be the case without the stablecoins.

This is somewhat ironic, because a primary reason digital currencies were created was to provide an alternative to government-issued currencies, especially the U.S. dollar. Yet, when they use the major stablecoins, people are supporting the dollar and U.S. government debt.

A longer-term effect of the growth of stablecoins could be more instability in the banking system.

Stablecoins aren’t supposed to pay interest to users. Instead, the issuers and exchanges that offer stablecoins collect the income from the bonds and any other assets backing the digital currencies.

But bank industry representatives say there are loopholes in the law. There might be ways the issuers and exchanges could pay some of that income to stablecoin users. If so, stablecoins could draw deposits from banks, reducing their capitalization and stability.

A similar series of events occurred in the 1970s and 1980s after money market funds were authorized. People moved assets from banks and savings and loan associations to money market funds, eventually leading to the demise of savings and loan associations.

Even if stablecoin users don’t receive income, the rise of stablecoins could cause problems for established financial institutions.

A stablecoin isn’t intended as an investment. It’s an alternative way to engage in financial transactions, such as investing and making payments.

Making transactions with stablecoins deprives established financial institutions of fees or other income they normally would receive.

In addition, large retailers and other businesses are looking into establishing their own stablecoins for customers to use to make purchases in stores and on their websites.

The businesses could avoid the fees charged by payment card issuers and others. That would be another hit to the finances of established financial services firms.

In anticipation, some large financial institutions reportedly are looking into creating their own stablecoins.

Regulators need to monitor the secondary effects of stablecoins. The benefits of lower fees for consumers and businesses could lead to problems for financial services businesses that have been earning fees and other income from the established system.

Gold Sets a Real Record High

The price of gold finally hit a real record high on Sept. 11.

Gold set a series of record high prices in 2024 and 2025. While impressive, those records don’t reflect inflation.

Gold reached a high of $850 on January 21, 1980. The price then collapsed, and gold didn’t approach $850 an ounce for a considerable time.

While gold struggled to return to its old high, inflation was steadily reducing the purchasing power of the dollar.

After adjusting for inflation, $850 in early 1980 is equal to about $3,590 in 2025. Someone who purchased an ounce of gold for $850 in 1980 and held it couldn’t sell the gold for the same inflation-adjusted purchasing power until this month.

So, it wasn’t until this month that gold hit an inflation-adjusted record high.

That’s not an argument to avoid buying gold. I’ve been recommending gold in our “Retirement Watch” portfolios for several years. My readers are benefitting from this historic gold bull market.

The lesson is that value and timing matter. It’s important to look at an investment’s fundamentals and insist on having a margin of safety.

Back in 1980, some people recommending gold argued that it would never lose real value. They didn’t foresee the multi-decade decline in inflation or believe that speculation and leverage had eliminated the margin of safety in gold.

I continue to recommend gold in our portfolios but don’t believe that its price never will decline. There will be a time to sell or to reduce our positions.

Recent Court Decision Doesn’t Mean the End of Tariffs

Some of the tariffs imposed by President Donald J. Trump were struck down by the Court of Appeals for the Federal Circuit at the end of August and previously had been invalidated by the Court of International Trade.

The administration said it will appeal to the U.S. Supreme Court.

Even if the President loses in the Supreme Court, that won’t mean the end of tariffs.

The tariffs under review by the courts were issued under the International Emergency Economic Powers Act of 1977 (IEEPA). The President asserted that there is an economic emergency, giving him the authority to impose most of the tariffs announced in 2025.

The Federal Circuit Court ruled that President Trump didn’t establish there was an emergency under the IEEPA. It also said the imposition of tariffs aren’t among the powers authorized under the law.

If the Supreme Court agrees and strikes down the tariffs, the President won’t be done with tariffs. There are several other laws that allow the President to impose tariffs under certain circumstances.

The President chose to justify the tariffs under IEEPA because that was the fastest and easiest way to impose tariffs. All he had to do was declare an emergency.

The other laws that allow tariffs impose some additional hurdles. One law allows tariffs, but only temporarily. Another law requires country-specific investigations and findings that justify tariffs. A third law allows tariffs but only for specific economic sectors, such as automobiles.

A loss in the Supreme Court would require the government to refund most of the tariffs already paid. It would be interesting to see if the court requires refunds by a certain date or allows the government to stretch out the refund period.

Administration officials have said that they always are working on alternative plans. Presumably, they are doing the work behind the scenes to impose tariffs quickly under laws other than IEEPA, if necessary.

In the meantime, the tariffs remain in place until the Supreme Court rules, which isn’t likely for months.

The Data

The Consumer Sentiment Index from the University of Michigan fell to 55.4 in September from 58.2 in August.

The biggest change was in consumers’ expectations, which fell to their lowest level in four months.

In addition, the expected five-year inflation rate increased to 3.9% from 3.5%. That indicates the Federal Reserve is losing its credibility on inflation.

Retail sales increased 0.6% in August, after rising the same amount in July. The 12-month increase in retail sales was 5.0% through August, up from 4.1% through July.

After excluding gasoline and vehicle sales, retail sales increased 0.7% in August, an improvement from 0.3% in July.

The retail sales numbers aren’t adjusted for inflation or for tariffs. But the numbers indicate that consumers can increase their spending despite a weaker labor market.

Industrial production increased 0.1% in August after falling 0.4% in July. Over 12 months, industrial production rose 0.9% through August after being up 1.3% through July.

Manufacturing production was up 0.2% in August after falling 0.1% in July. The 12-month increase in manufacturing production was 0.9% through August and 1.3% through July, the same numbers as for industrial production.

The Empire State Manufacturing Index tumbled to -8.70 in September from 11.90 in August. New orders and shipments both declined sharply.

The Consumer Price Index (CPI) increased 0.4% in August compared to 0.2% in July. The 12-month increase in the CPI was 2.9% through August and 2.7% through July.

The core CPI, which excludes food and energy prices, rose 0.3% in both August and July. Over 12 months, the core CPI was up 3.1% through both August and July.

Optimism among home builders was unchanged in September. The Housing Market Index from the National Association of Home Builders was 32 in both September and October.

Housing starts dropped 8.5% in August, the largest decline in five months, following a 3.4% rise in July. The number of housing starts in August was the fourth-lowest since May 2020.

In recent months, starts for single-family housing declined while multi-family housing starts increased. But in August, both single-family and multi-family home starts fell.

In the latest week, new unemployment claims increased by 27,000 to 263,000, the highest level since October 2021.

Continuing claims, which lag a week behind new claims, were unchanged at 1.939 million.

The Markets

The S&P 500 rose 1.49% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.17%. The Russell 2000 increased 0.89%. The All-Country World Index (excluding U.S. stocks) added 1.87%. Emerging market equities advanced 3.59%.

Long-term treasuries gained 1.26% for the week. Investment-grade bonds increased 0.81%. Treasury Inflation-Protected Securities (TIP) added 0.37%. High-yield bonds gained 0.43%.

In the currency sector, the U.S. dollar declined 1.06%.

Energy-based commodities increased 2.38%. Broader-based commodities rose 2.77%. Gold gained 1.65%.

Bob’s News & Updates

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