Central bank digital currency: the end of monetary policy as we know it?
bankunderground.co.uk
bankunderground.co.uk
If households and firms were given access to CBcoin accounts at the CB, banks’ dominant role as providers of payment services would be called into question. As a risk-free, interest-bearing asset, CBcoin would be preferable to bank deposits (and even paper currency, presuming anonymity concerns were addressed), encouraging households and firms to convert their bank deposits into CBcoin deposits.
In effect, retail payments (and securities transactions) would no longer have to be mediated by banks, as the funds would be transferred directly from one party’s CBcoin account to another’s. A disintermediated payment system could gradually replace the current centralised system and its associated credit and liquidity risks (see BIS (2003)). The main benefit to CBcoin account holders would be access to cheap and fast peer-to-peer transactions.
This sounds like all of the benefits of a centralized currency -- most importantly, stability and regulation -- with all of the benefits of current decentralized currency endeavours (Bitcoin, etc.). Assuming anonymity concerns are addressed, as they highlight.
The impact on the banking system, however, would indeed be substantial. Providing payment services is a significant source of revenue for banks.
Edit: grammar
What do you mean by "absorbed from the top private banks"?
If they solve the anonymity problem (such that they can replace paper currency, which can also be entirely anonymous), then I'd expect that you could buy anything you want with it.
Subject to anti-money-laundering rules, of course, which usually apply to larger transactions.
> it won't triple in value in one year
That doesn't have much to do with the currency, but with the market, and volatility works both ways.
...and 15bn EUR banknotes. If you think about it, they all have a serial number and it's easy to track them with a mere bigdata database. Most banknotes change hands only once before being registered in a bank again. The others are all suspicious. Keeping your money for a few months? Not a crime by itself but in most situations it's linked with laundering. Withdrawing every week from your ATM and cashed by the same drug dealer? They probably won't scream it over the roofs, but the FBI probably already uses this technique to track criminals.
If you think it's hard to track patterns in banknotes, it's ok, but it's less hard than tracking every single CB transaction across the world.
> As a risk-free, interest-bearing asset, CBcoin would be preferable to bank deposits (and even paper currency, presuming anonymity concerns were addressed), encouraging households and firms to convert their bank deposits into CBcoin deposits.
While governments might not prefer anonymous payment methods to exist, they can still recognize that much of the money-using public appreciates anonymous payments at least some of the time.
To the extent that "governments" don't like anonymous payment methods, that's mostly law enforcement/security agencies.
Central banks basically recognize that anonymous payments mechanisms will exist, and prefer that central bank currency fill that role, since the more non-central-bank money is used in practice, the less predictable effect central bank monetary policy has.
Edit: Fractional reserve banking is generally seen as a good thing by many economists. Many believe this allows central banks to stimulate and throttle the economy, ending recessions and leveling off bubbles. Why would central banks do anything to undermine this?
From an economics point of view, what they are essentially proposing is to modify the banking system so that it resembles their models.
Their models are stylised, highly simplified, and have to be massively "callibrated" in order to match economic observations at all, and even then can only usually do so between financial crashes. (The part of economics that analyses business cycles hasn't discovered the Nyquist theorem yet.)
The best guess at what would result of this, is all the problems of centralised control, and none of the advantages of the existing system. Another way to think about it is a bunch of complete maniacs being allowed to run experiments on the live production system without any testing.
Although hopefully it won't come to that.
You mean like NIRP and QE? -_-' Like you said, these guys live in an textbook economic fantasy world.
The problem is that the normal "transmission mechanism" of monetary policy is to encourage credit, and both the commercial world and consumers are in a state where they either don't want or don't need credit.
(anonymity is a primarily utility for criminals/tax evaders)
I don't expect central governments to jump ship primarily because of the arbitrary authority that tax auditing, among other powers, that it gives them, though
And terrorist and child predators, right?
Are there economists that support the idea of stopping the creation of new money? I assumed this was an underlying requirement of a health currency? New value is created every day by thousands of different sources, and the currency needs to be able to expand at the same rate.
You've just identified the most difficult problem facing the financial world today: how to expand the money supply at a rate that's fair to all market participants.
market participants === us
Neither are inherently necessary for a growing economy. And there are other alternative ideas that are reasonable tools to expand the money supply if needed.
Why does the currency need to expand at the same rate? You could also have the real value of the currency appreciate. Before you say, 'that's deflationary' - many countries had large swaths of time when their currency was deflationary with little or no ill effect to the population, and increasing standards of living.
(I don't intend that as a rhetorical question - I'm sincerely asking.)
Curious, are US treasuries or interest in a savings account considered "dead weight" in your definition?
[1] http://treasurydirect.gov/NP/debt/current [2] https://fred.stlouisfed.org/series/WSAVNS
Because the demand for money and credit ebbs and flows. Why would you curb the supply? It's literally paper and bits.
Do you think there should be the same amount of money in a world of 100 people as there is in a world of 100 million?
Not necessarily, and you may be conflating demand for a currency (which controls its valuation and exchange rate) with economic productivity in an economy.
Its not so much, I imagine, about stopping the creation of money - the economic fundamentals behind why inflation is good are obvious. The promise of digital currencies going forward is the hopeful removal of human irrationality from the process.
Would you prefer to trust the Federal Reserve, with all its own internal goals and motivations, to print money "honestly", or would you rather have an algorithm that adjusted the block payout rate to maintain constant 1% inflation in the monetary base, relative to monetary velocity? IE, when the money slows down, which implies money is being hoarded because its value is rising, you print more to offset it, and when money speeds up you reduce the printing speed to try to keep the velocity stable.
I would prefer that people not have to create their own promissory notes during economic booms because it's impossible to create a legitimate loan due to the current monetary supply. You're begging for a black market currency at that point.
We have not yet found a consistent set of rules for setting monetary policy that work across the board. The problem is compounded for dual-mandate central banks such as the Federal Reserve. Even measuring inflation is a manual process - how would you code basket selection into your currency?
At the moment I'd rather have a (democratically accountable) human in the loop. I don't have anything like the level of confidence in economic theory to trust any argument that 1% is the "right" level of inflation for all time. If there are unforseen shifts in the economy and we end up thinking that (say) 10% inflation is the best thing to do at the moment, I'd rather we had the capability to do that.
Until we have evidence of an optimal money growth rate, I want the system to be flexible.
>keep the velocity stable.
Velocity is, basically, a fudge factor in the PQ = MV equation (as in, it makes the formula work). Is there any research that points to stable velocity being optimal? I think it changes drastically over time.
I think you're on the right track, and "the system" could definitely use more transparency and objectivity. But I don't think there's any algorithm near ready for prime time. The economy is too complex.
Value/resources are also lost and/or used up. Inflation is only necessary for an expanding human population.
> banks will eventually start looking more like investment intermediaries
As you stated if you divorce payments from lending they are simply investment intermediaries. I'd argue that today the payment systems versus lending mechanisms are completely independent and yet TBTF banks are protected via CB from failing as if the two (payment systems and lending) were inseparable.
Risk.
That is, banks should pay more interest (or have less-negative rates) than the CB currency, because
1. They're riskier. They can have solvency problems and liquidity problems (mitigated by the CB and the law, now and in the future to varying extents)
2. They want your money to lend to other people at yet higher interest rates. If they don't have reserves they can't make loans and they go out of business, so they pay you a premium for your deposits.
As I understand it banks don't use deposits to back-up lending. There are folks in HN more knowledgeable then myself that may correct me, however, banks leverage Tier 1 capital to create loans. Deposits are the result of the loans and not vice versa. So banks aren't paying you interest because they need your deposits in order to lend.
[1] http://www.cnbc.com/id/100497710 [2] http://www.bankofengland.co.uk/publications/Documents/quarte...
1. You acquire a large debt to the bank,
2. The bank gives you a bunch of money,
3. You give that money to someone else.
Steps 2 and 3 usually happen at the same time, AIUI you don't actually have the money in your bank account.
Now, in the general case the "someone else" belongs to another bank. When "you" give them the money, your bank has to fork over a chunk of cash. They actually have to get that cash from somewhere. Either that have loads of spare money, or they have deposits, or they get loans themselves. If they get a loan they pay the loan rate (say the Fed funds rate), if they have deposits they presumably pay less.
On the other hand, if the "someone else" belongs to the same bank, the bank actually still needs to have some (though not as much) cash to support this -- that's the "fractional" in "fractional reserve lending". The loan to you is an asset, the other guy's balance is a liability, but the bank is legally required to have cash to support deposits, not just promises and collateral.
Banks don't rely on existing deposits to make loans, the loans are backed by themselves, they're created out of nothing. I'd recommend this short video which shows how banks create money from loans:
The main way banks make money is by lending money, which also creates matching bank deposits. They do require some reserve-backed deposits for liquidity, capital adequacy ratios/reserve requirements, but not that much.
See this publication from England's central bank: http://www.bankofengland.co.uk/publications/Documents/quarte...
Yes. But this only works if the banking system, on average, holds onto the deposits it creates. This way of doing things would break down if everybody withdrew their deposits into cash every time they got a loan and everybody only transacted in cash. The same thing would happen if borrowers immediately withdrew their deposits into CBCoin.
A question will arise to who owns what if there ever is a derivative bubble? Will we get digital currency decentralised made by hackers then?
Here is a visual representation of different types of money and markets. http://money.visualcapitalist.com/all-of-the-worlds-money-an...
http://www.jstor.org/stable/2338493?seq=1#page_scan_tab_cont...
Now, whether this was due to the gold standard, or whether the reason was one (or more) of the other trillions of factors that are different between now and then, we cannot say.
A fact?
Here's a sample of inflation from that period:
1878: -15%
1879: -10%
1880: 20%
1881: -5%
1882: 8%
1883: -2%
My claim is true for interest rates, however. Here's one chart: http://www.businessinsider.com/us-treasury-yields-at-histori...
We have a 100-year long period here, starting around 1820, where interest rates basically moved within a band of 3-6%. The 100 years following that are a very different story. Here we see the interest rate move from 2% to 15% and back to 2% in 75 years, from 1945 to now.
This is not surprising, its obvious. I'm kind of baffled by the implied premise that stable interest rates are preferable to stable inflation, though.
> I'm kind of baffled by the implied premise that stable
> interest rates are preferable to stable inflation, though.
With regards to achieving stable inflation, to me it just looks like we've flattened out the spikes, not gotten rid of them [1]. And, mind you, the two spikes at ~1865 and ~1914 were caused by wars. We can't exactly say we had either a world war or a civil war from 1965 to 1985.
The Mises Institute isn't an impartial source when it comes to the economy, they have a clear agenda, pushing for free market economics.
If you've read the book, I'd be interested to know what it makes of the Panic of 1907: